Electronic Business: Concepts, Methodologies, Tools, and Applications (4-Volumes)

Electronic Business: Concepts, Methodologies, Tools, and Applications

In Lee Western Illinois University, USA

Volume I

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Library of Congress Cataloging-in-Publication Data Electronic business : concepts, methodologies, tools, and applications / In Lee, editor. p. cm. Includes bibliographical references and index. Summary: "This set of books offers a research compilation from over 250 LQWHUQDWLRQDODXWKRUVLQWKH¿HOGRIHEXVLQHVV3URYLGHGE\SXEOLVKHU ISBN 978-1-60566-056-1 (hardcover) -- ISBN 978-1-60566-057-8 (ebook) 1. Electronic commerce. I. Lee, In, 1958HF5548.32.E356 2009 658.8'72--dc22 2008043212

British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. All work contributed to this book set is original material. The views expressed in this book are those of the authors, but not necessarily of the publisher.

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Editor-in-Chief Mehdi Khosrow-Pour, DBA Editor-in-Chief Contemporary Research in Information Science and Technology, Book Series

Associate Editors Steve Clarke University of Hull, UK Murray E. Jennex San Diego State University, USA Annie Becker Florida Institute of Technology USA Ari-Veikko Anttiroiko University of Tampere, Finland

Editorial Advisory Board Sherif Kamel American University in Cairo, Egypt In Lee Western Illinois University, USA Jerzy Kisielnicki Warsaw University, Poland Keng Siau University of Nebraska-Lincoln, USA Amar Gupta Arizona University, USA Craig van Slyke University of Central Florida, USA John Wang Montclair State University, USA Vishanth Weerakkody Brunel University, UK

Additional Research Collections found in the “Contemporary Research in Information Science and Technology” Book Series Data Mining and Warehousing: Concepts, Methodologies, Tools, and Applications John Wang, Montclair University, USA • 6-volume set • ISBN 978-1-60566-056-1 Electronic Business: Concepts, Methodologies, Tools, and Applications In Lee, Western Illinois University • 4-volume set • ISBN 978-1-59904-943-4 Electronic Commerce: Concepts, Methodologies, Tools, and Applications S. Ann Becker, Florida Institute of Technology, USA • 4-volume set • ISBN 978-1-59904-943-4 Electronic Government: Concepts, Methodologies, Tools, and Applications Ari-Veikko Anttiroiko, University of Tampere, Finland • 6-volume set • ISBN 978-1-59904-947-2 Knowledge Management: Concepts, Methodologies, Tools, and Applications Murray E. Jennex, San Diego State University, USA • 6-volume set • ISBN 978-1-59904-933-5 Information Communication Technologies: Concepts, Methodologies, Tools, and Applications Craig Van Slyke, University of Central Florida, USA • 6-volume set • ISBN 978-1-59904-949-6 Intelligent Information Technologies: Concepts, Methodologies, Tools, and Applications Vijayan Sugumaran, Oakland University, USA • 4-volume set • ISBN 978-1-59904-941-0 Information Security and Ethics: Concepts, Methodologies, Tools, and Applications Hamid Nemati, The University of North Carolina at Greensboro, USA • 6-volume set • ISBN 978-1-59904-937-3 Medical Informatics: Concepts, Methodologies, Tools, and Applications Joseph Tan, Wayne State University, USA • 4-volume set • ISBN 978-1-60566-050-9 Mobile Computing: Concepts, Methodologies, Tools, and Applications David Taniar, Monash University, Australia • 6-volume set • ISBN 978-1-60566-054-7 Multimedia Technologies: Concepts, Methodologies, Tools, and Applications Syed Mahbubur Rahman, Minnesota State University, Mankato, USA • 3-volume set • ISBN 978-1-60566-054-7 Virtual Technologies: Concepts, Methodologies, Tools, and Applications Jerzy Kisielnicki, Warsaw University, Poland • 3-volume set • ISBN 978-1-59904-955-7

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List of Contributors

Aggarwal, Praveen \ University of Minnesota Duluth, USA........................................................... 1993 Agostino Ardagna, Claudio \ University of Milan, Italy ................................................................ 2198 Aiken, Damon \ Eastern Washington University, USA.................................................................... 1029 Aldiri, Khalid \ University of Bradford, UK.................................................................................... 1503 Al-Hajri, Salim \ Higher College of Technology, Oman ................................................................. 1159 Al-Hakim, Latif \ University of Southern Queensland, Australia..................................................... 482 Ali, Eman Al Haj \ Higher Colleges of Technology, UAE............................................................... 1121 Alwabel, S. A. \ University of Bradford, UK........................................................................................ 59 Anagnostou, Miltiades \ National Technical University of Athens, Greece.................................... 2360 Anckar, Bill \ Omena Hotellit Oy / IAMSR, Finland ......................................................................... 550 Andreescu, Francesca \ University of Greenwich, UK ................................................................... 1665 Arbore, Alessandro \ Bocconi University, Italy ................................................................................ 185 Ash, Colin G. \ Edith Cowan University, Australia ............................................................................. 33 Awazu, Yukika \ Institute for Engaged Business Research, The Engaged Enterprise, USA........... 1980 Azumah, Gideon \ 8QLYHUVLW\RI6KHI¿HOG8. ............................................................................... 1653 Baker, Jeff \ Texas Tech University, USA......................................................................................... 1943 Baldwin, Dirk \ University of Wisconsin–Parkside, USA.................................................................. 263 Beck, Charles E. \ University of Colorado at Colorado Springs, USA........................................... 1967 Benslimane, Djamal \ University of Lyon - Lyon, France................................................................. 373 Bhogle, Srinivas \ National Aerospace Laboratories, India................................................................ 11 Blake, Jaqueline \ University of Southern Queensland, Australia .................................................. 1329 Blass, Eddie \ Ashridge Business School, UK.................................................................................. 1603 Boateng, Beatrice A. \ Ohio University, USA.................................................................................. 1023 Boateng, Kwasi \ Ohio University, USA .......................................................................................... 1023 Bonney, Norman \ The Robert Gordon University, UK .................................................................. 2014 Boondao, Roongrasamee \ Ubon Rajathanee University, Thailand ............................................... 1038 Boonstra, Albert \ University of Groningen, The Netherlands ............................................................. 1 Boonyathan, Patcharee \ University of Melbourne, Australia.......................................................... 482 Boppana, Rajendra V. \ University of Texas at San Antonio, USA................................................... 972 Borzemski, Leszek \ Wroclaw University of Technology, Poland ................................................... 1416 Bose, Indranil \ The University of Hong Kong, Hong Kong ........................................................... 1348 Bose, Ranjit \ University of New Mexico, USA.................................................................................. 219 Bouras, Athanasios \ National Technical University of Athens, Greece ........................................... 504 Bozman, Carl S. \ Gonzaga University, USA .................................................................................. 1526 Bunduchi, Raluca \ University of Aberdeen Business School, UK ................................................. 1472

Burn, Janice M. \ Edith Cowan University, Australia......................................................................... 33 Bylin, Zachary \ University of Washington, Tacoma, USA ............................................................. 1137 Camacho, David \ Universidad Autónoma de Madrid, Spain ........................................................... 781 Cannoy, Sherrie D. \ The University of North Carolina at Greensboro, USA ................................ 2323 Caro, Denis H. J. \ Université d’Ottawa, Canada........................................................................... 2571 Cha, Taihoon \ Hankuk University of Foreign Studies, Korea ........................................................ 1993 Chakrabarty, Subrata \ Texas A&M University, USA...................................................................... 290 Chalasani, Suresh \ University of Wisconsin–Parkside, USA ........................................................... 972 Cheng, T.C.E. \ The Hong Kong Polytechnic University, Hong Kong ............................................ 1540 Chituc, Claudia-Melania \ INESC Porto, Portugal............................................................................ 91 Chung, Sam \ University of Washington, Tacoma, USA.................................................................. 1137 Clarke, Roger \ Xamax Consultancy Pty Ltd, Australia, University of New South Wales, Australia, Australian National University, Australia, & University of Hong Kong, Hong Kong....... 895 Clegg, Ben \ Aston University, USA ................................................................................................... 314 Collan, Mikael \ Åbo Akademi University, Finland........................................................................... 550 Coltman, Tim \ University of Wollongong, Australia...................................................................... 1780 Condon, Bradly \ Instituto Tecnológico Autónomo de México, Mexico and Bonds University, Australia............................................................................................................................................ 2228 Conlon, Sumal J. \ University of Mississippi, USA ......................................................................... 2413 Connolly, Thomas \ University of Paisley, UK ................................................................................. 910 Cox, Sharon \ Birmingham City University, UK ............................................................................... 109 Craig, Ron \ Wilfrid Laurier University, Canada ...................................................................... 154, 652 Crawford-Mathis, Krista J. \ Capella University, USA................................................................. 1748 Currie, Wendy L. \ Warwick University, UK .................................................................................. 1690 Dai, Wei \ Victoria University, Australia............................................................................................ 750 Damiani, Ernesto \ University of Milan, Italy................................................................................. 2198 Dasgupta, Prithviraj \ University of Nebraska, Omaha, USA.......................................................... 393 D’Aubeterre, Fergle \ The University of North Carolina at Greensboro, USA .............................. 2432 Davalos, Sergio \ University of Washington, Tacoma, USA............................................................. 1137 de Brock, Bert \ University of Groningen, The Netherlands ................................................................. 1 Desouza, Kevin C. \ Institute for Engaged Business Research, The Engaged Enterprise, USA..... 1980 Dholakia, Nikhilesh \ University of Rhode Island, USA ................................................................... 469 Dolnicar, Sara \ University of Wollongong, Australia ..................................................................... 1780 Dologite, Dorothy G. \ Baruch College, USA ................................................................................... 238 Dong, Ming \ Wayne State University, USA..................................................................................... 2455 Doolin, Bill \ Auckland University of Technology, New Zealand..................................................... 1121 Dortschy, Martin \ Institute of Electronic Business — University of Arts, Germany ..................... 2143 Du, Jun \ Tianjin University, China ................................................................................................. 2131 Duan, Yanqing \ University of Bedfordshire, UK ............................................................................ 1103 Edwards, Sam \ Nagoya University, USA and Japan...................................................................... 1890 Ellonen, Hanna-Kaisa \ Lappeenranta University of Technology, Finland.................................... 1236 Elsammani, Zakia A.\ Manchester Metropolitan University, UK..................................................... 421 Ettinger, Andrew \ Ashridge Business School, UK ......................................................................... 1603 Ewing, Michael \ Monash University, Australia................................................................................ 589 Fang, Chua Fang \ Multimedia University, Malaysia ....................................................................... 865 Fink, Dieter \ Edith Cowan University, Australia............................................................................ 2143

Fitzgerald, Guy \ Brunel University, UK........................................................................................... 197 Flavián, Carlos \ University of Zaragoza, Spain ............................................................................. 1740 Forgionne, Guisseppi \ University of Maryland, Baltimore County, USA...................... 440, 709, 1797 Forsberg, Kim \ Intrum Justitia Finland, Finland .......................................................................... 1558 Fotopoulos, Vassilis \ Hellenic Open University, Greece ................................................................ 2265 Fotoui, Farshad \ Wayne State University, USA.............................................................................. 2455 Frati, Fulvio \ University of Milan, Italy ......................................................................................... 2198 Friesner, Daniel \ Gonzaga University, USA ................................................................................... 1526 Fulford, Heather \ Loughborough University, UK.......................................................................... 1402 Gaik Yee, Chan \ Multimedia University, Malaysia .......................................................................... 277 Ganzha, Maria \ EUH-E and IBS Pan, Poland............................................................................... 2466 Gartenfeld, Marc E. \ St. John’s University, USA............................................................................. 238 *ąVLRURZVNL5DIDá \ Warsaw University of Technology, Poland.................................................... 2466 Gasmelseid, Tagelsir Mohamed \ King Faisal University, Kingdom of Saudi Arabia..................... 800 Gawinecki, Maciej \ IBS Pan, Poland............................................................................................. 2466 Gerst, Martina \ The University of Edinburgh, UK ........................................................................ 2284 Godshalk, Veronica M. \ Pennsylvania State University, USA....................................................... 1617 Gould, Carmen \ RMIT University, Australia ................................................................................. 2072 Gouvas, Panagiotis \ National Technical University of Athens, Greece ........................................... 504 Guah, Matthew W. \ Warwick University, UK ................................................................................ 1690 Guan, Sheng-Uei \ National University of Singapore, Singapore ............................................. 822, 851 Gudigantala, Naveen \ Texas Tech University, USA ....................................................................... 1486 Guido, Anna Lisa \ Università di Lecce, Italy................................................................................... 451 Guinalíu, Miguel \ University of Zaragoza, Spain .......................................................................... 1740 Gunasekaran, A. \ University of Massachusetts - Dartmouth, USA ................................................... 59 Guo, Chiquan \ The University of Texas-Pan American, USA........................................................ 1456 Ha, Lidan \ Coppin State University, USA......................................................................................... 709 Hale, Jason G. \ University of Mississippi, USA ............................................................................. 2413 Hamilton, John \ James Cook University, Australia ......................................................................... 347 Harkke, Ville \ Åbo Akademi University, Finland ............................................................................. 550 Häsel, Matthias \ University of Duisburg-Essen, Germany ............................................................ 1905 He, Fang \ Southern Illinois University at Carbondale, USA.......................................................... 1189 Hoanca, Bogdan \ University of Alaska Anchorage, USA............................................................... 1576 Hobbs, Dave \ University of Bradford, UK...................................................................................... 1503 Holton, Viki \ Ashridge Business School, UK.................................................................................. 1603 Huang, Xiaoqing \ Seattle University, USA..................................................................................... 2025 Huegle, Tobias \ Edith Cowan University, Australia ....................................................................... 2143 Huerta, Esperanza \ Instituto Tecnológico Autónomo de Mexico, Mexico..................................... 1222 Huq, Golenur Begum \ University of Western Sydney, Australia ..................................................... 829 Hwang, Yuan-Chu \ National Chengchi University, Taiwan .......................................................... 2337 Hyska, Wawrzyniec \ Warsaw University of Technology, Poland .................................................. 2466 ,¿QHGR3ULQFHO\ \ University of Jyväskylä, Finland ....................................................................... 1254 Issac, Biju \ Swinburne University of Technology, Malaysia........................................................... 2155 Iyer, Lakshmi \ The University of North Carolina at Greensboro, USA......................... 44, 2323, 2432 Jakobs, Kai \ Aachen University, Germany..................................................................................... 2284 Jane, F. Mary Magdalene \ P. S. G. R. Krishnammal, India .......................................................... 2183

Jasimuddin, Sajjad M. \ University of Wales at Aberystwyth, UK ................................................. 2556 Jayadev, Satya \ The University of North Carolina at Greensboro, USA ....................................... 1276 Jiao, Jianxin (Roger) \ Nanyang Technological University, Singapore.......................................... 2131 Jiao, Yuan-Yuan \ Nankai University, China .................................................................................. 2131 Jones, Donald R. \ Texas Tech University, USA .............................................................................. 1486 Kankanhalli, Atreyi \ National University of Singapore, Singapore ................................................ 669 Kantola, Mauri \ Turku Polytechnic, Finland................................................................................. 1590 Kettunen, Juha \ Turku Polytechnic, Finland ................................................................................. 1590 Kim, Ben B. \ Seattle University, USA............................................................................................. 2025 Kim, Seunghan \ Samsung SDS, Korea........................................................................................... 1993 Klein, Matthias \ University of New Brunswick, Canada ................................................................. 766 Koh, S.C. Lenny \ 8QLYHUVLW\RI6KHI¿HOG8. ...................................................................... 1653, 1853 Kollmann, Tobias \ University of Duisburg-Essen, Germany......................................................... 1905 Komolafe, Olufemi \ The Robert Gordon University, UK............................................................... 2014 Kshetri, Nir \ The University of North Carolina at Greensboro, USA ............................................ 1276 Kubota, Takashi \ Waseda University, Japan.................................................................................. 2214 Kuivalainen, Olli \ Lappeenranta University of Technology, Finland ............................................ 1236 Kulviwat, Songpol \ Hofstra University, USA................................................................................. 1456 Kung, Mabel T. \ California State University-Fullerton, USA........................................................ 1870 Lai, L.C.F. \ The Hong Kong Polytechnic University, Hong Kong.................................................. 1540 Lakka, Spyridoula \ University of Athens, Greece ......................................................................... 1709 Lam, Wing \ U21 Global, Singapore ............................................................................................... 1178 Lawson, Robyn \ University of Western Sydney, Australia ............................................................... 829 Lee, Peggy D. \ The Pennsylvania State University – Great Valley, USA........................................ 1929 Lee, So-Jung \ JLee Consulting, Singapore..................................................................................... 1178 Lee, Wonyoung \ Marketing Lab, Korea ......................................................................................... 1993 Lee, Young M. \ IBM T.J. Watson Research Center, USA.................................................................. 620 Leow, Chye-Huang \ Singapore Polytechnic, Republic of Singapore............................................... 117 Li, Changqing \ National University of Singapore, Singapore ....................................................... 2304 Liang, Ying \ University of Paisley, UK........................................................................................... 2389 Liljander, Veronica \ Swedish School of Economics and Business Administration, Finland ......... 1558 Lin, Helen J. \ University of Auckland, New Zealand ..................................................................... 1630 Ling, Tok Wang \ National University of Singapore, Singapore..................................................... 2304 Lionis, Nikolas E. \ University of Athens, Greece ........................................................................... 1709 Lopes Azevedo, Américo \ INESC Porto, Portugal ............................................................................ 91 López, Natalia \ Universidad Complutense de Madrid, Spain ........................................................ 2088 Lukose, Susan \ University of Mississippi, USA.............................................................................. 2413 Luo, Xin \ Virginia State University, USA........................................................................................ 1920 Maamar, Zakaria \ Zayed University - Dubai, UAE......................................................................... 373 Macaulay, Linda \ The University of Manchester, UK...................................................................... 992 Madan, Manohar \ University of Wisconsin–Whitewater, USA........................................................ 635 Maguire, Stuart \ 8QLYHUVLW\RI6KHI¿HOG8.................................................................................. 1653 Manouselis, Nikos \ Agricultural University of Athens, Greece........................................................ 725 Maringanti, Kiran \ University of Bolton, UK................................................................................ 1064 McPherson, Matthew Q. \ Gonzaga University, USA .................................................................... 1526 Melliar-Smith, P. Michael \ University of California, Santa Barbara, USA .................................... 393

Mendo, Fernando Alonso \ Brunel University, UK .......................................................................... 197 Mentzas, Gregoris \ National Technical University of Athens, Greece............................................. 504 Merisavo, Marko \ Helsinki School of Economics, Finland ........................................................... 1430 Miller, Christopher \ University of Glamorgan Business School, UK............................................ 1002 0LãLü9RMLVODY% \ University of Manitoba, Canada........................................................................ 325 Mock, Kenrick \ University of Alaska Anchorage, USA ................................................................. 1576 Mockler, Robert J. \ St. John’s University, USA ............................................................................... 238 Mohammed, Lawan A. \ Swinburne University of Technology, Malaysia ..................................... 2155 Moreau, Éliane M.-F. \ Unversité du Québec à Trois Rivières, Canada ........................................ 1054 Moser, Louise E. \ University of California, Santa Barbara, USA.................................................... 393 Mykytyn, Kathleen \ Southern Illinois University, USA................................................................. 2245 Mykytyn, Peter P. \ Southern Illinois University at Carbondale, USA................................. 1189, 2245 Nakajima, Masaaki \ Reitaku University, Japan ............................................................................ 2495 Nakazaki, Takashi \ Anderson Mori & Tomotsune, Japan ............................................................. 2530 New, Steve \ University of Oxford, UK .............................................................................................. 245 Nitsch, Detlev \ Wilfrid Laurier University, Canada ......................................................................... 652 Oliver, Stanley \ University of Bolton, UK ...................................................................................... 1064 Ordanini, Andrea \ Bocconi University, Italy ................................................................................... 185 Packham, Gary \ University of Glamorgan Business School, UK .................................................. 1002 Paiano, Roberto \ Università di Lecce, Italy ..................................................................................... 451 Pal, Raktim \ James Madison University, USA ............................................................................... 1348 Pandya, Anil M. \ Northeastern Illinois University Chicago, USA................................................... 469 Papaioannou, Ioannis \ National Technical University of Athens, Greece..................................... 2360 Paprzycki, Marcin \ SWPS and IBS Pan, Poland ........................................................................... 2466 Pavic, S. \ 8QLYHUVLW\RI6KHI¿HOG8............................................................................................... 1853 Pease, Wayne \ University of Southern Queensland, Australia ....................................................... 1329 Perkins, John \ Newman University College, UK ............................................................................. 109 Phan, Raphael C.-W. \ Swinburne University of Technology, Malaysia........................................... 879 Piazza, Bradley \ University of Wisconsin–Parkside, USA ............................................................... 263 Pisarek, Szymon \ Warsaw University of Technology, Poland........................................................ 2466 Pliaskin, Alex \ Victoria University, Australia ....................................................................... 1373, 1396 Polsa, Pia \ Swedish School of Economics and Business Administration, Finland.......................... 1558 Qahwaji, Rami \ University of Bradford, UK.................................................................................. 1503 Quah, Tong-Seng \ Nanyang Technological University, Republic of Singapore............................... 117 Quan, Jing \ Salisbury University, USA........................................................................................... 1754 Radhamani, G. \ Multimedia University, Malaysia........................................................................... 865 Rajendran, R. \ Sri Ramakrishna Institute of Technology, Coimbatore, India ............................... 1764 Ranganathan, C. \ University of Illinois, USA ................................................................................ 1317 Rao, G. S. V. Radha Krishna \ Multimedia University, Malaysia.......................................... 277, 2115 Raven, Peter V. \ Seattle University, USA........................................................................................ 2025 Raymond, Louis \ Unversité du Québec à Trois Rivières, Canada................................................. 1054 Reale, Salvatore \ Siemens Mobile Communication S.p.A, Italy ..................................................... 2198 Rege, Manjeet \ Wayne State University, USA ................................................................................ 2455 Roberts, Barbara \ The University of Southern Queensland, Australia ............................................. 75 Rodríguez, Ismael \ Universidad Complutense de Madrid, Spain.................................................. 2088 Rohatgi, Ravni \ Southampton, UK ................................................................................................. 1103

Rossi, Matti \ Helsinki School of Economics, Finland ...................................................................... 565 Roussaki, Ioanna \ National Technical University of Athens, Greece ............................................ 2360 Ruzic, Fjodor \ Institute for Informatics, Croatia ........................................................................... 2044 Sabri, Ehap H. \ University of Texas at Dallas, USA ........................................................................ 679 Saha, Pallab \ National University of Singapore, Singapore........................................................... 1843 Sainio, Liisa-Maija \ Lappeenranta University of Technology, Finland......................................... 1236 Salam, A.F. \ The University of North Carolina at Greensboro, USA ................................................. 44 Samundeeswari, E. S. \ Vellalar College for Women, India............................................................ 2183 Sankaran, Sundar G. \ Atheros Communications, USA ................................................................... 965 Scacchi, Walt \ University of California, Irvine, USA ....................................................................... 603 Scupola, Ada \ Roskilde University, Denmark................................................................................. 1089 Sell, Anna \ Åbo Akademi University, Finland................................................................................... 550 Seo, Dong Back \ University of Illinois, USA .................................................................................. 1317 Shan, Lee Moh \ National University of Singapore, Singapore ........................................................ 669 Shata, Osama \ 6SHFLDOL]HG(QJLQHHULQJ2I¿FH(J\SW................................................................... 2099 Shin, Hyonkil \ Hankuk University of Foreign Studies, Korea ....................................................... 1993 Shumanov, Michael \ Monash University, Australia ........................................................................ 589 Simmons, Geoff \ University of Ulster, UK ..................................................................................... 1002 Simpson, M. \ 8QLYHUVLW\RI6KHI¿HOG8........................................................................................ 1853 Singh, Rahul \ The University of North Carolina at Greensboro, USA..................................... 44, 2432 Sinha, Tapen \ Instituto Technológico Autónomo de México, Mexico and University of Nottingham, UK ......................................................................................... 1723, 2228 Smolander, Kari \ Lappeenranta University of Technology, Finland ............................................... 565 Song, Jaeki \ Texas Tech University, USA.............................................................................. 1486, 1943 Sounderpandian, Jayavel \ University of Wisconsin–Parkside, USA............................................... 635 6WDQV¿HOG0DUN \ University of Paisley, UK .................................................................................... 910 Subhadra, K. \ ICICI Bank, India ................................................................................................... 1723 Sugumaran, Vijayan \ Oakland University, USA.............................................................................. 219 Sutanto, Juliana \ National University of Singapore, Singapore ...................................................... 669 Tait, Elizabeth \ The Robert Gordon University, UK ...................................................................... 2014 Takasugi, Naoshi \ Doshisha University, Japan.............................................................................. 2514 Tan, Bernard C. Y. \ National University of Singapore, Singapore.................................................. 669 Tan, Boon \ Sunderland Business School, UK ................................................................................... 314 Tan, Felix B. \ Auckland University of Technology, New Zealand................................................... 1630 Tan, Yin Leng \ The University of Manchester, UK........................................................................... 992 Tassabehji, Rana \ University of Bradford, UK ................................................................................ 142 Tatnall, Arthur \ Victoria University, Australia .................................................................... 1159, 1373 Tazawa, Motoaki \ Meijo University, Japan ................................................................................... 1289 Thakur, Ramendra \ Utah Valley State College, USA.................................................................... 1456 Thomas, Brychan \ University of Glamorgan Business School, UK .............................................. 1002 Toleman, Mark \ The University of Southern Queensland, Australia................................................. 75 Tran, Thomas \ University of Ottawa, Canada ................................................................................. 533 Treiblmaier, Horst \ Vienna University of Economics and Business Administration, Austria........ 1442 Tripathi, Nitin Kumar \ Asian Institute of Technology, Thailand .................................................. 1038 Tsoularis, Anastasios \ Massey University, New Zealand ................................................................. 142 Urquhart, Cathy \ University of Auckland, New Zealand............................................................... 1630

Urquiza, Alfonso \ Francisco de Vitoria University, Spain ............................................................... 925 Vaidyanathan, Ganesh \ Indiana University South Bend, USA...................................................... 1821 Varoutas, Dimitris \ University of Athens, Greece.......................................................................... 1709 Vassiliadis, Bill \ Hellenic Open University, Greece........................................................................ 2265 Vermot-Desroches, Bernard \ Unversité du Québec à Trois Rivières, Canada ............................. 1054 Vinjamur, Anil \ University of Mississippi, USA............................................................................. 2413 Vivekanandan, K. \ Bharathiar University, India........................................................................... 1764 Wallace, James \ University of Bradford, UK ................................................................................... 142 Wang, Fen \ University of Maryland, Baltimore County, USA................................................ 440, 1797 Warkentin, Merrill \ Mississippi State University, USA................................................................. 1920 Weiss, Michael \ Carleton University, Canada................................................................................ 2367 Weng, Zhiyong \ University of Ottawa, Canada ............................................................................... 533 Wiggins, Anne \ The London School of Economics and Political Science, UK ................................ 174 Wojtkowski, Wita \ Boise State University, USA .............................................................................. 758 Wong, Dennis M. L. \ Swinburne University of Technology, Malaysia ............................................ 879 Xu, Mark \ Portsmouth Business School, UK ................................................................................. 1103 Yan, Yuhong \ Canada National Research Council, Canada ............................................................ 766 Yap, Alexander Y. \ Elon University, USA......................................................................................... 401 Yau, Wei-Chuen \ Multimedia University, Malaysia....................................................................... 2115 Ye, Alex \ The University of Hong Kong, Hong Kong...................................................................... 1348 Yeung, A.C.L. \ The Hong Kong Polytechnic University, Hong Kong ............................................ 1540 Yuan, Soe-Tsyr \ National Chengchi University, Taiwan ................................................................ 2337 Zairi, M. \ University of Bradford, UK ................................................................................................ 59 Zhang, Jenny Yi \ California State University-Fullerton, USA ...................................................... 1870 Zhang, Zuopeng (Justin) \ Eastern New Mexico University, USA ................................................. 2556 Zhao, Fang \ RMIT University, Australia ...................................................................... 701, 1309, 2072 Zhao, J. Leon \ University of Arizona, USA ...................................................................................... 325

Contents

Volume I Section I. Fundamental Concepts and Theories This section serves as the foundation for this exhaustive reference tool by addressing crucial theories essential to the understanding of electronic business. Chapters found within these pages provide an H[FHOOHQWIUDPHZRUNLQZKLFKWRSRVLWLRQHEXVLQHVVZLWKLQWKH¿HOGRILQIRUPDWLRQVFLHQFHDQGWHFKnology. Individual contributions provide overviews of semantic e-business, e-business innovation, and HHQWUHSUHQHXUVKLSZKLOHDOVRH[SORULQJFULWLFDOVWXPEOLQJEORFNVRIWKLV¿HOG:LWKLQWKLVLQWURGXFWRU\ section, the reader can learn and choose from a compendium of expert research on the elemental theories underscoring the research and application of e-business. Chapter 1.1. Identifying E-Business Options ......................................................................................... 1 Albert Boonstra, University of Groningen, The Netherlands Bert de Brock, University of Groningen, The Netherlands Chapter 1.2. E-Governance................................................................................................................... 11 Srinivas Bhogle, National Aerospace Laboratories, India Chapter 1.3. Managing E-Business Change ......................................................................................... 33 Colin G. Ash, Edith Cowan University, Australia Janice M. Burn, Edith Cowan University, Australia Chapter 1.4. Semantic E-Business ........................................................................................................ 44 Rahul Singh, The University of North Carolina at Greensboro, USA Lakshmi Iyer, The University of North Carolina at Greensboro, USA A.F. Salam, The University of North Carolina at Greensboro, USA

Chapter 1.5. The Evolution of ERP and its Relationship with E-Business........................................... 59 S. A. Alwabel, University of Bradford, UK M. Zairi, University of Bradford, UK A. Gunasekaran, University of Massachusetts - Dartmouth, USA Chapter 1.6. The Role of Government in E-Business Adoption........................................................... 75 Barbara Roberts, The University of Southern Queensland, Australia Mark Toleman, The University of Southern Queensland, Australia Chapter 1.7. Business Networking: The Technological Infrastructure Support ................................... 91 Claudia-Melania Chituc, INESC Porto, Portugal Américo Lopes Azevedo, INESC Porto, Portugal Chapter 1.8. A Knowledge Management Approach to Improving E-Business Collaboration............ 109 Sharon Cox, Birmingham City University, UK John Perkins, Newman University College, UK Chapter 1.9. Linking Businesses for Competitive Advantage; A Mobile Agent-Based Approach..... 117 Tong-Seng Quah, Nanyang Technological University, Republic of Singapore Chye-Huang Leow, Singapore Polytechnic, Republic of Singapore Chapter 1.10. Integrating E-Supply Networks: The Need to Manage Information Flows and Develop E-Platforms ......................................................................................................... 142 Rana Tassabehji, University of Bradford, UK  -DPHV:DOODFH8QLYHUVLW\RI%UDGIRUG8. Anastasios Tsoularis, Massey University, New Zealand Chapter 1.11. E-Com Supply Chain and SMEs .................................................................................. 154  5RQ&UDLJ:LOIULG/DXULHU8QLYHUVLW\&DQDGD Chapter 1.12. EU SMEs and E-Business Innovation.......................................................................... 174  $QQH:LJJLQV7KH/RQGRQ6FKRRORI(FRQRPLFVDQG3ROLWLFDO6FLHQFH8. Chapter 1.13. Environmental Drivers of E-Business Strategies Among SMEs ................................. 185 Alessandro Arbore, Bocconi University, Italy Andrea Ordanini, Bocconi University, Italy Chapter 1.14. The Evolving Web Presence of SMEs: An Empirical Approach to E-Business .......... 197 Fernando Alonso Mendo, Brunel University, UK Guy Fitzgerald, Brunel University, UK Chapter 1.15. Challenges for Deploying Web Services-Based E-Business Systems in SMEs........... 219 Ranjit Bose, University of New Mexico, USA Vijayan Sugumaran, Oakland University, USA

Chapter 1.16. B2B E-Business............................................................................................................ 238 Robert J. Mockler, St. John’s University, USA Dorothy G. Dologite, Baruch College, USA Marc E. Gartenfeld, St. John’s University, USA Chapter 1.17. Innovation and B2B E-Commerce: Explaining What Did Not Happen ...................... 245 Steve New, University of Oxford, UK Chapter 1.18. The Business of Online Education ............................................................................... 263  'LUN%DOGZLQ8QLYHUVLW\RI:LVFRQVLQ±3DUNVLGH86$  %UDGOH\3LD]]D8QLYHUVLW\RI:LVFRQVLQ±3DUNVLGH86$ Chapter 1.19. An Introductory Study on Business Intelligence Security ........................................... 277 Chan Gaik Yee, Multimedia University, Malaysia G. S. V. Radha Krishna Rao, Multimedia University, Malaysia Chapter 1.20. Strategies for Business Process Outsourcing: An Analysis of Alternatives, Opportunities, and Risks..................................................................................................................... 290 Subrata Chakrabarty, Texas A&M University, USA Section II. Development and Design Methodologies This section provides in-depth coverage of conceptual architectures, frameworks and methodologies related to the design and implementation of e-business models, systems, and technologies. Throughout these contributions, research fundamentals in the discipline are presented and discussed. From broad H[DPLQDWLRQVWRVSHFL¿FGLVFXVVLRQVRQSDUWLFXODUIUDPHZRUNVDQGLQIUDVWUXFWXUHVWKHUHVHDUFKIRXQG ZLWKLQWKLVVHFWLRQVSDQVWKHGLVFLSOLQHZKLOHDOVRRIIHULQJGHWDLOHGVSHFL¿FGLVFXVVLRQV%DVLFGHVLJQV as well as abstract developments, are explained within these chapters, and frameworks for designing successful e-services, strategies, and software are discussed. Chapter 2.1. E-Business Planning and Analysis Framework.............................................................. 314 Ben Clegg, Aston University, USA Boon Tan, Sunderland Business School, UK Chapter 2.2. E-Business Reference Models........................................................................................ 325  9RMLVODY%0LãLü8QLYHUVLW\RI0DQLWRED&DQDGD J. Leon Zhao, University of Arizona, USA Chapter 2.3. Building and Managing Modern E-Services.................................................................. 347 John Hamilton, James Cook University, Australia Chapter 2.4. A Context-Based and Policy-Driven Method to Design and Develop Composite Web Services .................................................................................................................... 373 Zakaria Maamar, Zayed University - Dubai, UAE Djamal Benslimane, University of Lyon - Lyon, France

Chapter 2.5. Dynamic Pricing for E-Commerce................................................................................. 393 Prithviraj Dasgupta, University of Nebraska, Omaha, USA Louise E. Moser, University of California, Santa Barbara, USA P. Michael Melliar-Smith, University of California, Santa Barbara, USA Chapter 2.6. Planning and Designing an Enterprise-Wide Database System for E-Business ............ 401 Alexander Y. Yap, Elon University, USA Chapter 2.7. SMEs ECT Reality: From Ad-Hoc Implementation to Strategic Planning.................... 421 Zakia Elsammani, Manchester Metropolitan University, UK Chapter 2.8. BSC-Based Framework for E-Business Strategy........................................................... 440  )HQ:DQJ8QLYHUVLW\RI0DU\ODQG%DOWLPRUH&RXQW\86$ Guisseppi Forgionne, University of Maryland, Baltimore County, USA Chapter 2.9. A Design Tool for Business Process Design and Representation................................... 451 Roberto Paiano, Università di Lecce, Italy Anna Lisa Guido, Università di Lecce, Italy Chapter 2.10. B2C Failures: Toward an Innovation Theory Framework ........................................... 469 Anil M. Pandya, Northeastern Illinois University, Chicago, USA Nikhilesh Dholakia, University of Rhode Island, USA Chapter 2.11. Procedure for Modeling and Improving E-SCM Processes ......................................... 482 Patcharee Boonyathan, University of Melbourne, Australia Latif Al-Hakim, University of Southern Queensland, Australia Chapter 2.12. A Semantic Service-Oriented Architecture for Business Process Fusion .................... 504 Athanasios Bouras, National Technical University of Athens, Greece Panagiotis Gouvas, National Technical University of Athens, Greece Gregoris Mentzas, National Technical University of Athens, Greece Chapter 2.13. A Mobile Intelligent Agent-Based Architecture for E-Business .................................. 533  =KL\RQJ:HQJ8QLYHUVLW\RI2WWDZD&DQDGD Thomas Tran, University of Ottawa, Canada Chapter 2.14. Using E- and M-Business Components in Business: Approaches, Cases, and Rules of Thumb............................................................................................................................ 550 Mikael Collan, Åbo Akademi University, Finland Anna Sell, Åbo Akademi University, Finland Ville Harkke, Åbo Akademi University, Finland Bill Anckar, Omena Hotellit Oy / IAMSR, Finland &KDSWHU&RQÀLFWV&RPSURPLVHVDQG3ROLWLFDO'HFLVLRQV0HWKRGRORJLFDO&KDOOHQJHVRI Enterprise-Wide E-Business Architecture Creation............................................................................ 565 Kari Smolander, Lappeenranta University of Technology, Finland Matti Rossi, Helsinki School of Economics, Finland

Chapter 2.16. Developing a Global CRM Strategy ............................................................................ 589 Michael Shumanov, Monash University, Australia Michael Ewing, Monash University, Australia Chapter 2.17. Understanding the Development of Free E-Commerce/E-Business Software: A Resource-Based View...................................................................................................................... 603  :DOW6FDFFKL8QLYHUVLW\RI&DOLIRUQLD,UYLQH86$

Volume II Chapter 2.18. Balancing Accuracy of Promised Ship Data and IT Costs........................................... 620  KLJK@%6%&³B2B E-Commerce Integration”

CASE SUMMARIES Case 1 )RU+DOOLEXUWRQWKHSULPDU\EHQH¿FLDULHVZHUH the offshore project managers who needed access to the HR employee tables for personnel management and gained this through the innovative use of web-based technology. The result was one of considerable cost savings and improvement of staff resourcing through improved decision making by the project managers when working off shore. The intrinsic motivation and self-management of autonomous knowledge within the development team played an important role in the successful implementation. The emphasis was much more on collective performance rather than individual,

35

Managing E-Business Change

but at the same time, development and maintenance of personal and professional reputations ZDVDVLJQL¿FDQWGULYHU,QWHUHVWLQJO\ZKLOHWKH project was rated highly successful there was strong opposition from their partner operations to implement the same system. This came from the counterpart HR staff who had not been exposed to the participative development process. The organisational management was luke-warm in their support initially, viewing the proposed system as a threat to a strongly centralised control FXOWXUH2QFHWKHEHQH¿WVEURNHGRZQWKHLULQLWLDO reluctance, management assumed responsibility for the success and leadership for global implementation. We are very proud of our Web-based Personnel reporting system. (SAP project manager)

Case 2 British Biotech is a research and development stage pharmaceutical company based in the UK. Its mission is to create partnerships with pharmaceutical companies to complete the development and marketing of its compounds. The B2B Procurement project was able to ease the workload of the company’s procurement department by automating the old, paper-bound purchasing process. The next step of the project was to negotiate more favourable conditions with the slimmed-down vendor base and build up closer business relationships with each one. $SDUWIURPPRUHHI¿FLHQWSXUFKDVLQJSURFHGXUHV the company’s buyers have a more interesting job. Biotech’s scientists should be relieved of routine paperwork, enabling them to concentrate more on research. B2B Procurement is expected to broaden day-to-day task base (Shaw, 2003). They’ll have more time to spend on nurturing relationships and working on optimisation of projects and other duties. (manager of SAP B2B project)

36

Case 3 Fujitsu-Siemens Computers (FSC) showed how a computer technology division within a large global organisation succeeded in making the sell-side e-business processes available over the Internet. An order and request (extranet) system was developed as an appropriate online sales system by leveraging the power of graphics and Internet technology, thus extending the reach for FURVVGLYLVLRQDOXVHUV7KHHI¿FLHQF\JDLQVFDPH from speed, accuracy and security of order transDFWLRQV7KHSULPDU\EHQH¿FLDULHVZHUHWKHRWKHU business partners (divisions) and independent partners. The result was one of considerable cost saving and greatly improved online sales, through any time, anywhere access (Siemens, 1999). Interestingly, while the project was rated moderately successful the opposition came from the partner reluctance to implement the same sysWHPGXHWRWKHFRQÀLFWRIWKHHVWDEOLVKHGRIÀLQH sales channels. Further, the lack of a coordinated corporate wide strategy by the parent company was viewed as the main obstacle for uptake of the system by the business partners. The lessons learned were two fold; (1) the use of a common platform needs the agreement of all functions, (2) The internal and external marketing of the facility is essential to the acceptance of divisional business network and to foster end-user acceptance of the technological change in business SUDFWLFH2QFHWKHLQLWLDOEHQH¿WVEURNHGRZQXVHU UHOXFWDQFHPDQDJHPHQW³DVVXPHG´UHVSRQVLELOLW\ and leadership for a new global strategy. It highlights the need to evolve a coordinated corporate VWUDWHJ\DQGHQFRXUDJHVWKHEDODQFLQJRIFRQÀLFWing organisational knowledge when contemplating the adoption of e-business solutions. We are beginning to recognise the potential EHQH¿WVRIOHYHUDJLQJRXUHEXVLQHVVSURFHVVHV and functionality through the new Web-based environment. (SBS manager)

Managing E-Business Change

Case 4 ,Q'HOOSLRQHHUHGLWV¿UVW%%³HEXVLQHVV integration” with an established customer company, LSI. This case demonstrates a comprehensive approach to inter-enterprise computing. This is an example of an integration architecture made possible through a variety of backend systems and procurement systems. LSI, was able to leverage its existing backend system and SAP business connector supported by Web technology to communicate directly with Dell’s e-business system. The integration between LSI’s SAP system and B2B e-procurement application to Dell catalogues automated the procurement of Dell products via the Internet (Dell, 2000). :HDUHEHJLQQLQJWRUHFRJQLVHWKHSRWHQWLDOEHQH¿WV of leveraging our partners SAP R/3 business processes and functionality through B2B e-Commerce integration. (Dell’s B2B project manager)

FINDINGS AND IMPLICATIONS 7KHRYHUDOO¿QGLQJVVKRZWKH'HOO&RUSRUDWLRQ achieved most success, Fujitsu-Siemens Computers achieved moderate success, while Halliburton was least successful. Assuming these ratings UHÀHFWWKHSUHVHQFHRIIDFLOLWDWRUVDQGLQKLELWRUV WKHQWKHLQLWLDO¿QGLQJVLQGLFDWHWKDWDVXFFHVVIXO project should have facilitators in all components, including the business environment and project management, (e.g., Dell). Further there is the implication that the least successful e-business projects will have inhibitors in the areas of cultural readiness and change management practice, (e.g., Halliburton).

Evaluation of E-Business Project Success Table 1 summarises the data captured on each construct. Consistent with the research objec-

WLYHVVSHFL¿FSUREHVZHUHPDGHFRQFHUQLQJWKH constructs of each component of eBC. In addition, any construct that had a positive or negative LQÀXHQFH RQ FRQGXFWLQJ H%& RU RYHUDOO H%& effectiveness, was documented with either a plus (+) or a minus (–) sign. These positive or negative LQÀXHQFHVZHUHLGHQWL¿HGDQGFURVVYDOLGDWHGHLther through direct statements by the respondents during the interview or from other data sources. In some cases, both positive and negative (+ & –) contributions were found from one component variable. For Halliburton leadership was found to exhibit (+ & –) contributions. Table 1 is especially useful in separating those constructs that have variance across the range B2B Interactions and those that have none. For stimuli all four case were the same, proactive but reacted very differently to stimuli. To be successful, eBC management must support a proactive way the organisation reacts to the stimuli. While most successful organisations had positive characteristics, not all characteristics were seen to be HTXDOO\LPSRUWDQWRULQGHHGWRGLUHFWO\LQÀXHQFH success. Some constructs such as cross-functional cooperationZHUHVHHQDV³VDWLV¿FLQJ´IDFWRUVWKDW is, they needed to be present but not necessary to be excellent. These involve components other than strategy and cultural readiness.

Lessons Learned In Table 1, Dell is rated as the most successful project consistently showing positive facilitators in all components of the eBC model. In contrast, FSC acknowledged many inhibitors, and is rated moderately successful. Inhibitors to eBC were clustered in the areas of cultural readiness and change management. 7KHVHUHVXOWVFRQ¿UPWKDWWKHPRUHVXFFHVVful projects were found to have facilitators in all components of the eBC framework, including the change environment and project management. Further, there is the implication that the least successful e-business projects will have inhibitors in

37

Managing E-Business Change

7DEOH'HWDLOHG¿QGLQJVIRUHDFKFRQVWUXFWZLWK ±LGHQWL¿HG eBC Components constructs Strategic Initiatives stimuli formulation scope decision making

Case #1 Halliburton

Case #2 Biotech

Case #3 FSC

+ pro-active? incremental

+ pro-active incremental

+ pro-active revolutionary

autocratic (centralised) eventually

+ champion emergence onset

- autocratic -onset

+ apro-activeb + a incremental, revolutionaryb + achampion emergenceb + aonsetb +

+ leadership welcomed +

- leadership cautious -? ?

a + leadership + awelcomedb + +

learn by doing response to IT change

learn by doing response to IT change

double-loop

+ double-loop

single-loop

boundary spanners

technology gate keeper

Case #2 Biotech

boundary spanners, customers + R&D resources IT, knowledgebase Case #3 FSC

+ alearn by doingb + alearning from others response to ITb + adouble-loop single-loopb + +aboundary spanners, technol. keeperb a + focus on core competenciesb

dominant factor

dominant factor

+ aenablingb +

+ adequate

+ adequate

+ asuperiorb +

+ cooperative

cooperative

+ acooperativeb+

+ superior

adequate

+ aadequateb +

committed

- participative

+ radical change

improvement

+ acommitted, participativeb +a a improvement, radical changeb + aevolutionary, revolutionary change tacticsb +

strategy led Cultural Readiness change agents +&risk aversion welcomed extent of open communictn. + Learning Capacity improve efficiency learn by doing adaptation + learning from others learning type external information use

declarative knowledge knowledge base

eBC Components constructs IT Leveragability role of IT

Case #1 Halliburton

+enabling & socio-technical use Internet technology + superior Network relationships inter-organisational + cooperative linkages cross-functional adequate cooperation Change Mgt Practice mgt’s. readiness to change participative pattern of change scope of change

+ improvement

managed change

alleviation of + a well managed dissatisfaction change process

e-Bus. Mgt Practice e-business measures

improvement feedback loop use of e-business tools and + adequate techniques use of team structure +

Key:

38

R&D resources IT

improvement feedback loop adequate +

a vision for change, a well managed change

a

Case #4. Dell & LSIb

Case #4. Dell & LSIb

a

e-business info. + ause e-bus metrics, auditb capture + superior + asuperior, adequateb + +a

+ = facilitator, - = inhibitor, + & - = facilitator and inhibitor, ? = unknown

Managing E-Business Change

both dimensions, especially in the area of cultural readiness and change management (Farhoomand, Markus, Gable, & Khan, 2004). The cases highlight the need to evolve a coordinated corporate strategy and encourage the EDODQFLQJRIFRQÀLFWLQJRUJDQLVDWLRQDONQRZOHGJH when contemplating the adoption of e-business solutions. While this research found an important role for IT in support of eBC, the message from these case studies is that IT should not drive ebusiness projects. $OWKRXJKDOOIRXUFDVHVUHSRUWHGD³SURDFWLYH´ response to the strategic stimuli construct, each reacted very differently to stimuli. In managing eBC, the organisation needs be proactive in reacting to stimuli. While the most successful organisation had positive characteristics in all components, not all characteristics were seen to EHHTXDOO\LPSRUWDQWRULQGHHGWRGLUHFWO\LQÀXence success (Markus, Axline, Petrie, & Tanis, 2000). This is viewed as a satisfying condition for success.

A MODEL FOR MANAGING E-BUSINESS CHANGE

Strategy/Planning Level Strategic Initiatives 7KHUH WHQGV WR EH VWUDWHJLF ³VWLPXOL´ UDQJLQJ from competitive pressures, continued market leadership, customer expectations, employee disVDWLVIDFWLRQDQGRUJDQLVDWLRQLQHI¿FLHQFLHVWKDW trigger managers to undertake eBC: ‡

•

•

$FFRUGLQJWRWKHVH¿QGLQJVPDQDJHPHQW of eBC does not have to be proactive to be successful, but rather by the way the organisation reacts to the stimuli. This is viewed as DVDWLV¿FLQJFRQGLWLRQIRUPDQDJLQJH%& Incremental eBC can work but appears to be appropriate when risk aversion is welcomed. Also incremental projects were perceived as revolutionary in nature. Successful eBC projects establish an objective and unbiased team or individual champion that continues to push the organisation DQGJURXSVWR¿QGQHZLQQRYDWLYHSURFHVVHV

Figure 2. A model for managing e-business change

:KLOHWKHVWXG\XVHGDÀDWPRGHORIH%&ZKHUH all constructs in Table 1 were considered antecedents to success, the results from the case analyses VXJJHVW D PRUH VRSKLVWLFDWHG FRQ¿JXUDWLRQ RI interrelated components. A dynamic model for managing eBC is proposed for future studies where the focus is on inter-relationships between the components of eBC within three core levels of business activity: strategy, development and management. Figure 2 represents a new conceptual framework for managing eBC distilled from the case ¿QGLQJV,WLOOXVWUDWHVKRZVWUDWHJ\GULYHVGHYHOopmental and management activity, management supports developments in e-business, which in turn provides feedback to strategic planning (Kaplan & Norton, 2004; Kaplan & Sawhney, 2000). 39

Managing E-Business Change

These champions must be empowered to implement the changes within a culture of e-business readiness (Segev & Gebauer, 2001).

2.

Cultural Readiness To address complexities of change, each component must be aligned, along with the enabling technology, to the strategic initiatives (Hesterbrink, 1999):

3.

4. •

•

•

An organisation attempting to change performance radically seems to require some ³VHQVHRIXUJHQF\´LQWKHLUEXVLQHVVVLWXDtion, which translates in turn into a compelling vision that is espoused throughout the organisation (Farhoomand et al., 2004). To overcome pockets of reluctance to change, an organisation’s vision for change must provide an atmosphere of communication where individual concerns are not seen negatively but rather welcomed (Craig & Jutla, 2000) An important ingredient in the right cultural mix for successful eBC is leadership from the top and initiatives from employees, together with an atmosphere of open communication, participation, committed cross-functional access to experts, and committed interorganisational focus (Farhoomand et al., 2004).

Development Level 1.

40

Learning Capacity: Successful eBC projects are enabled in organisations that: • have a propensity to learn from best practice and customer needs, • exhibit learning whereby employees LQGLYLGXDOO\ DQG FROOHFWLYHO\ UHÀHFW on their past experiences, modify their course when necessary, and discover

new opportunities, a new culture of the learning organisation. Relationship Building: Successful eBC projects require commitment between partner organisations to use common IT platforms and sharing of corporate information (Oliver et al., 2003). Knowledge Capability: Successful eBC projects are enabled in organisations that leverage external information and experts, and focus on core competencies. IT Leveragability: Successful eBC involves the coalescence of ‘IT’ and e-business best practice, whereby IT plays a supportive, but not always commanding role that is linked to the business case for eBC. Balanced consideration of the social, technical, and business value elements should be maintained during implementation (Hesterbrink, 1999).

Management Level $ZHOOGH¿QHGWUDQVSDUHQWPDQDJHPHQWDSSURDFK should include a documented methodology of FKDQJH XVH REMHFWLYH DQG TXDQWL¿HG PHWULFV showing the value of change, continuously communicate process metrics to senior management, and possess a well-documented rollout of the new e-business design (Dell, 2000, Farhoomand et al., 2004). To achieve this requires continuous articulation and recognition of the value of reporting results, as well as monitoring each individual’s contribution and accountability to the overall company’s change effort. At this individual level, concern should be placed on how the eBC will improve employee satisfaction and the quality of work life (Guha et al., 1997). The nature of change was reported to be participative change resulting in an evolutionary FKDQJHWDFWLF7KLVZDVYLHZHGDVD³ZDWHUIDOO´ progression of change, starting with an alleviation of dissatisfaction by employees and eventually

Managing E-Business Change

working towards a well-managed e-business implementation from: (1) the alleviation of dissatisfaction, (2) with a vision for change, (3) by evolutionary change tactics, and (4) a wellmanaged process for change (Guha et al., 1997; Farhoomand et al., 2004).

FUTURE TRENDS :KLOHWKHVWXG\XVHGDÀDWH%&PRGHO)LJXUH 1) where all constructs were considered antecedents to success, a new model (Figure 2) was GHYHORSHGIURPFDVHWKH¿QGLQJV7KLVG\QDPLF model for managing eBC is recommended for use in future studies. It suggests an investigation of inter-relationships between the three levels of strategic planning, organisational development and management, as well between the components embedded within the levels. The cases presented used an established research framework for gathering evidence to identify the factors for success of an e-business project. This research framework demonstrated its ability to examine complex phenomena. It is seen as evolutionary in nature, and was content driven. It is essentially a diagnostic tool for identifying factors contributing to success of new e-busiQHVVPRGHOV,WVSHFL¿FDOO\XVHIXOIRUH[SORULQJ the phenomena related to the success of learning organisations where the key issues remain as people oriented organisational issues.

CONCLUSION 7KHUHVXOWVFRQ¿UPWKDWDVXFFHVVIXOSURMHFWZDV found to have facilitators in all components of the eBC framework, including the change environment and management practice. Further, there is the implication that the least successful e-business projects will have inhibitors in both components, especially in the area of e-business readiness and change management.

While broad generalisations from the four case studies are viewed as premature, various patterns of constructs were developed as indicators that have implications for both research and practice. These patterns represent indicators for: success, failure, a tendency to mediocrity, and variances across B2B interaction, where the latter is regarded DVWKHPRVWVLJQL¿FDQWLQGLFDWRU The eBC framework (Figure 1) and associated semi-structured interview protocol was found to be a useful research tool for exploring the complex phenomena of eBC. A new model for managing eBC (Figure 2) is recommended to other researchers in exploring the topic further.

REFERENCES Barua, A., Konana, P., Whinston, A. B., & Yin, F. (2001, Fall). Driving e-business excellence. Sloan Management Review, 36-44 Craig, J., & Jutla, D. (2000). E-business readiness: A customer-focused framework. UK: Addison Wesley Longman. Retrieved from http://www. awl.com/cseng/titles/0-201-71006-4/ Dell (2000). B2B e-commerce integration facts sheet. Round Rock.: Dell Corp. Eisenhardt, K. (1989). Building theories from case study research. Academy of Management Review, 14(4), 532-550. Farhoomand, A., Markus, M. L., Gable, G., & Khan, S. (2004). Managing (e)business transformation: A global perspective. Basingstoke, UK: Palgrave Macmillan. Guha, S., Grover, V., Kettinger, W. J., & Teng, J. T. C. (1997). Business process change and organisational performance: Exploring an antecedent model. Journal of Management Information Systems, 14(1), 119-154. Hesterbrink, C. (1999). E-business and ERP: Bringing two paradigms together. Retrieved September 15, 1999, from http://www.pwc.com/ 41

Managing E-Business Change

Kalakota, R., & Robinson, M. (1999). E-business: Roadmap for success. Reading, MA: AddisonWesley Longman. Kaplan, R. S., & Norton, D. P. (2000, Sep/Oct). Having trouble with your strategy? Then Map It. Harvard Business Review, 167-175. Kaplan, R. S., & Norton, D. P. (2004, Feb). Measuring the strategic readiness of intangible assets. Harvard Business Review, 49-58. Kaplan, S., & Sawhney, M. (2000). E-hubs: The new B2B marketplaces. Harvard Business Review, 78(3), 97-104. Kean, D., & Parent M. (1998). Conducting qualitative research in information systems: Lessons IURP WZR ¿HOGV Proceedings 9t h Australian Conference of Information Systems (pp. 301-310). Sydney: UNSW. Kumar, R. L., & Crook, C. W. (1999). A multidisciplinary framework for the management of inter-organisational systems. The DATA BASE for Advances in Information Systems, 30(1), 22-37. Markus, M. L., Axline, S., Petrie, D., & Tanis, C. (2000). Learning from adopters’ experiences with ERP: Problems encountered and success achieved. Journal of Information Technology, 15(4), 245-265. Oliver, K., Chung, A., & Samanich, N. (2003). Beyond Utopia, The realists guide to Internet-enabled supply chain management. 6WUDWHJ\%XVLQHVV, 23, 1-10. Scheer, A. W., & Habermann, F. (2000). Making ERP a success. Communications of the ACM, 43(4), 57-61. Segev, A., & Gebauer, J. (2001). B2B procurement and market transformation. Information Technology and Management, 2, 242-260. Kluwer Academic: The Netherlands.

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Shaw, J. M. (2003). E-business management. New York: Springer Press. Siemens. (1999). Success story linking SAP R/3 and the Internet. Nov. 19’99, Siemens Business Services GmbH & Co. Retrieved from http://www. siemens.de/sap/] Sharma, S. K. (2004). A change management framework for e-business solutions. In M. Singh & D. Waddell, E-business innovation and change management (pp. 54-69). Hershey, PA: Idea Group Publishing. Venkatraman, N., & Henderson, J. C. (1998, Fall). Real strategies for virtual organizing. Sloan Management Review, 33-48. Yin, R. K. (1989). Case study research: Design and methods (2n d ed.) Newbury Park, CA: Sage Publication.

KEY TERMS Change Management: The coordination and action by management required to lead the change of organisational systems and structures in order to support a new business activity or effort. Cultural Readiness: The preparedness of an organisation’s culture of its people and processes (past and present) to facilitate or inhibit change. E-Business Change: The processes surrounding the effective management of different stages of online business development and growth. E-Business Outcomes: E-business forces change to occur in three corporate domains; technology, process, and people–at strategic and operational levels. E-Business Performance Gains: The improvement in; corporate resourcing, employee work life and customer satisfaction.

Managing E-Business Change

E-Readiness or E-Business Readiness: The preparedness of an organisation’s technology, processes, and people to facilitate or inhibit ebusiness development.

This work was previously published in Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, edited by M. Khosrow-Pour, pp. 729-735, copyright 2006 by Information Science Reference (an imprint of IGI Global).

43

44

Chapter 1.4

Semantic E-Business Rahul Singh The University of North Carolina at Greensboro, USA Lakshmi Iyer The University of North Carolina at Greensboro, USA A.F. Salam The University of North Carolina at Greensboro, USA

ABSTRACT :HGH¿QH6HPDQWLFH%XVLQHVVDV³DQDSSURDFKWR managing knowledge for coordination of eBusiness processes through the systematic application of Semantic Web technologies.” Advances in Semantic Web-based technologies offer the means to integrate heterogeneous systems across organizations in a meaningful way by incorporating ontology—a common, standard, and shareable vocabulary used to represent the meaning of system entities; knowledge representation, with structured collections of information and sets of inference rules that can be used to conduct automated reasoning; and intelligent agents that collect content from diverse sources and exchange semantically enriched information. These primary components of the Semantic Web vision form the foundation technology for semantic eBusiness. The challenge for research in information systems

and eBusiness is to provide insight into the design of business models and technical architecture that demonstrate the potential of technical advancements in the computer and engineering sciences to EHEHQH¿FLDOWREXVLQHVVDQGFRQVXPHUV6HPDQtic eBusiness seeks to apply fundamental work done in Semantic Web technologies to support WKH WUDQVSDUHQW ÀRZ RI VHPDQWLFDOO\ HQULFKHG information and knowledge—including content and know-how—to enable, enhance, and coordinate collaborative eBusiness processes within and across organizational boundaries. Semantic eBusiness processes are characterized by the VHDPOHVV DQG WUDQVSDUHQW ÀRZ RI VHPDQWLFDOO\ enriched information and knowledge. We present a holistic view of semantic eBusiness that integrates emergent and well-grounded Semantic Web technologies to improve the current state of the art in the transparency of eBusiness processes.

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Semantic E-Business

INTRODUCTION The Semantic Web vision (Berners-Lee, Hendler, & Lassila, 2001) provides the foundation for semantic architecture to support the transparent exchange of information and knowledge among collaborating eBusiness organizations. Recent advances in Semantic Web-based technologies offer means for organizations to exchange knowledge in a meaningful way. This requires ontologies, to provide a standardized and shareable vocabulary to represent the meaning of system entities; knowledge representation, with structured collections of information and sets of inference rules that can be used to conduct automated reasoning; and intelligent agents that can exchange semantically enriched information and knowledge, and interpret the knowledge on behalf of the user (Hendler, 2001). It is increasingly clear that semantic technologies have the potential to enhance eBusiness processes. The challenge for research in information systems and eBusiness is to provide insight into the design of business models and technical architecture that demonstrate the potential of technical advancements in the computer and engineering sciences WREHEHQH¿FLDOWREXVLQHVVDQGFRQVXPHUV (%XVLQHVVLV³an approach to achieving business goals in which technology for information exchange enables or facilitates execution of activities in and across value chains, as well as supporting decision making that underlies those activities” (Holsapple & Singh, 2000). Inter-organizational collaborations are effective means IRURUJDQL]DWLRQVWRLPSURYHWKHHI¿FDF\RIWKHLU eBusiness processes and enhance their value propositions. Inter-organizational collaborative business processes require transparent informaWLRQDQGNQRZOHGJHH[FKDQJHDFURVVSDUWQHU¿UPV Businesses increasingly operate in a dynamic, knowledge-driven economy and function as knowledge-based organizations. Knowledge is GH¿QHG DV WKH KLJKHVW RUGHU LQ WKH FRQWLQXXP of data and information, as having utility and

VSHFL¿FLW\LQLWVFRQWH[WGRPDLQ)XQFWLRQDOO\DQG in systems, the lines between useful information and knowledge are blurred (Grover & Davenport,  )RUWKLVUHVHDUFKZHGH¿QHNQRZOHGJHDV ³LQIRUPDWLRQLQWKHFRQWH[WRIDVSHFL¿FSURElem domain, upon which action can be advised or taken.” Knowledge management includes facilities for the creation, exchange, storage, and retrieval of knowledge in an exchangeable and usable format, in addition to the critical facilities to use of knowledge to support business activity (O’Leary, 1998). It is important for eBusiness to explicitly recognize knowledge along with the processes and technologies for knowledge management. :HGH¿QH6HPDQWLFH%XVLQHVVDV³an approach to managing knowledge for coordination of eBusiness processes through the systematic application of Semantic Web technologies.” Semantic eBusiness applies fundamental work done in Semantic Web technologies, including ontologies, knowledge representation, multi-agent systems, and Web-services, to support the transparent ÀRZ RI VHPDQWLFDOO\ HQULFKHG LQIRUPDWLRQ DQG knowledge, including content and know-how, and enable collaborative eBusiness processes within and across organizational boundaries. In this article, we present an overview of the Semantic eBusiness vision, with emphasis on the conceptual foundations and research directions in Semantic eBusiness. In our view, Semantic eBusiness is founded upon three primary streams of research literature: Semantic Web technologies, including ontologies, knowledge Representation and intelligent software agents; knowledge management, including the creation, storage and retrieval, and the exchange of machine interpretable and useful information upon which action can be taken or advised; and eBusiness processes, including process automation, enterprise systems integration, and WKHFRRUGLQDWLRQRIZRUNÀRZVDQGDFWLYLWLHVZLWKLQ and across organizations. We provide a conceptual schematic of this grounding in Figure 1.

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Semantic E-Business

Figure 1. Semantic eBusiness vision founded upon existing work in Semantic Web technologies, knowledge management, and in the e-business processes literature

Knowledge Management Semantic Web Technologies

Knowledge Creation, Storage, Retrieval, and Exchange.

Ontology, Knowledge Representation, Intelligent Agents

Semantic eBusiness

eBusiness Process

The following sections provide a detailed discussion of these foundations upon which Semantic eBusiness is envisioned. We provide some directions, from our own research initiatives and that of others, leading towards making the Semantic eBusiness vision a reality. Interest in Semantic eBusiness in the information systems community is beginning to gather momentum through the formation of special interest groups in the research and practitioner communities. We provide a description of some of the organizations that are playing an important role in this. This article concludes with a summary and directions for future research in Semantic eBusiness.

Process Automation, Workflows, Coordination of Inter- and IntraOrganizational Processes

According to Berners-Lee et al. (2001), the ³6HPDQWLF:HE´FRPSULVHVDQGUHTXLUHVWKHIROlowing components in order to function:

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FOUNDATIONS Semantic Web Technologies The Semantic Web is an extension of the current :HELQZKLFKLQIRUPDWLRQLVJLYHQ³ZHOOGH¿QHG meaning´ WR DOORZ PDFKLQHV WR ³process and understand” the information presented to them (Berners-Lee et al., 2001).

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Knowledge Representation: Structured collections of information and sets of inference rules that can be used to conduct automated reasoning. Knowledge representations must be linked into a single system. Ontologies: Systems must have a way to discover common meanings for entity representations. In philosophy, ontology is a theory about the nature of existence; in systems, ontology is a document that formally GHVFULEHVFODVVHVRIREMHFWVDQGGH¿QHVWKH relationship among them. In addition, we need ways to interpret ontology. Agents: Programs that collect content from diverse sources and exchange the result ZLWKRWKHUSURJUDPV$JHQWVH[FKDQJH³GDWD enriched with semantics.”

Intelligent software agents can reach a shared understanding by exchanging ontologies that provide the vocabulary needed for discussion. Agents

Semantic E-Business

Figure 2. Semantic Web architecture (www. w3.org/DesignIssues/diagrams/sw-stack-2002. png; Berners Lee et al., 2001)

Source: http://www.w3.org/DesignIssues/diagrams/swstack-2002.png

can even bootstrap new reasoning capabilities when they discover new ontologies. Semantics makes it easier to take advantage of a service that only partially matches a request. “A typical process will involve the creation of a ‘value chain’ in which subassemblies of information are passed from one agent to another, each RQHµDGGLQJYDOXH¶WRFRQVWUXFWWKH¿QDOSURGXFW requested by the end user. Make no mistake: to create complicated value chains automatically on GHPDQGVRPHDJHQWVZLOOH[SORLWDUWL¿FLDOLQWHOligence technologies in addition to the Semantic Web.” (Berners-Lee et al., 2001)

XML-Based Technologies for Knowledge Representation and Exchange Technologies for developing meaningful semantic representations of information and knowledge exist through XML (eXtensible Markup Language—www.xml.org, www.w3.org/XML/), RDF (Resource Description Framework—www. w3.org/RDF/), and OWL (Web Ontology lan-

guage—www.w3.org/TR/owl-features/). XML and its related standards make it feasible to store knowledge in a meaningful way while supporting XQDPELJXRXVFRQWHQWUHSUHVHQWDWLRQDQGÀH[LEOH exchange over heterogeneous platforms (Chiu, 2000). XML allows the creation of customized tags and languages using XML schema, which GHVFULEHVSHFL¿FHOHPHQWVWKHGDWDW\SHVLQHDFK element, and their relationships. With the appropriate schema, XML documents can be parsed, validated, and processed by application software using XML parsers. Built upon accepted W3C standards, this provides the foundation for semantic technology for the capture, representation, exchange, and storage of knowledge that can be potentially used and shared by software agents. XML provides standardized representations of data structures for processing on heterogeneous systems without case-by-case programming. The use of XML-based technology, including ebXML (www.ebxml.org) and RossettaNet (www. RossettaNet.org), allows for the creation of common vocabularies for eBusiness to help automate business processes, allowing better collaboration and knowledge transfer between partners in semantically integrated systems. Initiatives to develop technologies for the Semantic Web make the content of the Web unambiguously computer-interpretable to make it amenable to agent interoperability and automated reasoning techniques (McIlraith, Son, & Zeng, 2001). RDF was developed by the W3C as a metadata standard to provide a data model and syntactical conventions to represent data semantics in a standardized interoperable manner (McIlraith et al., 2001). The RDF working group also developed RDF Schema (RDFS), an object-oriented type system that provides an ontology modeling language. Recently, there have been several efforts to build on RDF and RDFS with AI-inspired knowledge representation languages such as SHOE, DAML-ONT, OIL, and DAML+OIL (Fensel, 2000). The Web Ontology Language (OWL) has been standard-

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ized by the W3C as a knowledge representation language for the Semantic Web. OWL documents represent domain ontologies and rules, and allow knowledge sharing among agents through the standard Web services architecture. Web services technology provides the envelope and transport mechanism for information exchange between software entities. Knowledge exchange architectures use Simple Object Access Protocol (SOAP—www.w3.org/TR/soap/) messages to carry relevant semantic information in the form of OWL documents between agents. The Web services framework consists of the Web Services 'H¿QLWLRQ/DQJXDJH:6'/²ZZZZVGORUJ  which describes Web services in XML format and provides the basis for tools to create appropriate SOAP messages. These technologies provide the knowledge representation and exchange mechanism to allow collaborating organizations to seamlessly share information and knowledge to coordinate eBusiness processes.

Ontologies Description logics (DLs) form a basis for developing ontology to further the sharing and use of a FRPPRQXQGHUVWDQGLQJRIDVSHFL¿FSUREOHP'Hscription logics model the domain of interest using FRQVWUXFWVWKDWGHVFULEHGRPDLQVSHFL¿FREMHFWV and the relationships between them (Baader et al.,  'RPDLQVSHFL¿FREMHFWVDUHUHSUHVHQWHG using the concept construct, which is a unary predicate. Relationships between constructs are represented using the relations construct, which may be an n-ary predicate. Description logics, at the least, can be used to develop a model of the domain comprising:

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VSHFL¿FDWLRQV IRU WKH FUHDWLRQ RI FRPSOH[ concept and relation expressions built upon a set of atomic concepts and relations, the cumulative set of description logics that forms the basis for a knowledge base containing the properties of domain-dependent

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FRQFHSWVDQGUHODWLRQVVSHFL¿HGWKURXJKD set of assertions on the domain, and a set of reasoning procedures that allows suitable inferences from the concepts and the relationships between them.

Ontologies provide a shared and common XQGHUVWDQGLQJ RI VSHFL¿F GRPDLQV WKDW FDQ EH communicated between disparate application systems, and therein provide a means to integrate the knowledge used by online processes employed by eBusiness organizations (Klein et al., 2001). Ontology describes the semantics of the constructs that are common to the online processes, including descriptions of the data semantics that are common descriptors of the domain context. Staab et al. (2001) describe an approach for ontology-based knowledge management through the concept of knowledge metadata, which contains two distinct forms of ontologies that describe the structure of the data itself and issues related to the content of data. We refer the reader to Kishore et al. (2004) for more comprehensive discussion of ontologies and information systems. Ontology documents can be created using FIPA-compliant content languages like BPEL, RDF, OWL, and DAML to generate standardized representations of the process knowledge. The structure of ontology documents will be based on description logics. The recent adoption of the OWL standards by the World Wide Web Consortium (www.w3c.org) includes 2:/'/ZKLFKVSHFL¿HVWKHUHSUHVHQWDWLRQRI DL-based models into OWL documents. In the Semantic eBusiness vision, knowledge exchange and delivery can be facilitated by the availability and exchange of knowledge represented in OWL documents among intelligent software agents. Domain knowledge objects provide an abstraction to create, exchange, and use modular knowledge represented using OWL documents. This allows for a common vocabulary used for exchange of information and knowledge across all system participants. There are many EHQH¿WV WR VWRULQJ WKLV NQRZOHGJH LQ ;0/

Semantic E-Business

format, including standardization of semantics, validation ability and ‘well-formedness’, ease of use, re-use, and storage. In addition, the ability to exchange complete XML documents in W3C standards affords integration on heterogeneous platforms. All exchanges between agents take place using the standard Web services architecture to allow for platform independence, and facilitate exchange of information and knowledge in OWL documents. Capturing and representing modular knowledge in XML format facilitates their storage in a knowledge repository—a repository that enables storage and retrieval of XML documents of multiple knowledge modules depending upon the SUREOHPGRPDLQ7KHEHQH¿WVRIVXFKNQRZOHGJH repositories are the historical capture of knowledge modules that are available to all agents in the agent community. This ensures that a newly instantiated agent has access to knowledge available to the entire system.

Intelligent Agents Intelligent agents are action-oriented abstractions in electronic systems, entrusted to carry RXW YDULRXV JHQHULF DQG VSHFL¿F JRDORULHQWHG actions on behalf of users (Papazoglou, 2001). The agent paradigm can support a range of decisionmaking activity, including information retrieval, generation of alternatives, preference order ranking of options and alternatives, and supporting analysis of the alternative-goal relationships. $QLQWHOOLJHQWDJHQWLV³a computer system situated in some environment and that is capable of ÀH[LEOHDXWRQRPRXVDFWLRQLQWKLVHQYLURQPHQW in order to meet its design objectives” (Jennings :RROGULGJH 7KHVSHFL¿FDXWRQRPRXV behavior expected of intelligent agents depends on the concrete application domain and the expected role and impact of intelligent agents on the potential solution for a particular problem for which the agents are designed to provide cognitive support. Criteria for application of

agent technology require that the application domain should show natural distributivity with autonomous entities that are geographically distributed and work with distributed data; require ÀH[LEOHLQWHUDFWLRQwithout a priori assignment of tasks to actors; and be embedded in a dynamic environment (Muller, 1997). Intelligent agents are able to organize, store, retrieve, search, and match information and knowledge for effective collaboration among Semantic eBusiness participants. A fundamental implication is that knowledge must be available in formats that allow for processing by software agents. Intelligent agents can be used for knowledge management to support Semantic eBusiness activities. The agent abstraction is created by extending an object with additional features for encapsulation and exchange of knowledge between agents to allow agents to deliver knowledge to users and support decision-making activity (Shoham, 1993). Agents work on a distributed platform and enable the transfer of knowledge by exposing their public methods as Web services using SOAP and XML. In this respect, the interactions among the agents are modeled as collaborative interactions, where the agents in the multi-agent community work together to provide decision support and knowledge-based explanations of the decision problem domain to the user.

Knowledge Management Emerging business models are causing fundamental changes in organizational and inter-organizaWLRQDO EXVLQHVV SURFHVVHV E\ UHSODFLQJ FRQÀLFW with cooperation as a means to be economically HI¿FLHQW%HDP 2SHUDWLRQDOO\NQRZOHGJH PDQDJHPHQW.0 LV³a process that helps orJDQL]DWLRQV ¿QG VHOHFW RUJDQL]H GLVVHPLQDWH and transfer important information and expertise necessary for activities such as problem solving, dynamic learning, strategic planning, and decision making” (Gupta, Iyer, & Aronson,

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2000). From an organizational perspective, it is the management of corporate knowledge that can improve a range of organizational performance characteristics by enabling an enterprise to be more intelligent acting (Wiig, 1993). A system managing available knowledge must comprise facilities for the creation, exchange, storage, and retrieval of knowledge in an exchangeable and usable format, in addition to facilities to use the knowledge in a business activity (O’Leary, 1998). Many organizations are developing KM systems GHVLJQHGVSHFL¿FDOO\WRIDFLOLWDWHWKHH[FKDQJHDQG integration of knowledge in business processes for increasing collaboration to gain a competitive advantage. The Semantic eBusiness vision is built upon transparent information and knowledge exchange across seamlessly integrated systems over globally available Internet technologies to enable information partnerships among participants across the entire value chain. Such transparency enhances the utility and extensibility of knowledge management initiatives of an organization E\ DGGLQJ WKH DELOLW\ WR H[FKDQJH VSHFL¿F DQG transparent knowledge, utilizing unambiguously interpretable, standards-based representation formats (Singh, Iyer, & Salam, 2003). Implementing and managing such high levels of integration over distributed and heterogeneous information platforms such as the Internet is a challenging WDVNZLWKVLJQL¿FDQWSRWHQWLDOEHQH¿WVIRURUJDnizations embracing such collaboration. Organi]DWLRQVFDQJDLQVLJQL¿FDQWEHQH¿WVIURPWKHVH initiatives including optimized inventory levels, higher revenues, improved customer satisfaction, increased productivity, and real-time resolution of problems and discrepancies throughout the supply chain. The vision is to achieve dynamic collaboration among business partners and customers throughout a trading community through transparent exchange of semantically enriched information and knowledge.

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EBusiness, EBusiness Processes, and E-Marketplaces Electronic data interchange (EDI) established the preliminary basis for automating business-tobusiness (B2B) e-commerce (EC) transactions through facilities for organizations to share process information electronically using standardized formats and semantics. Strategies such as supply chain management (SCM) and enterprise resource planning (ERP) go beyond process automation by streamlining and integrating internal and interorganizational process for improved information availability across value-chain partners. While popular strategies such as SCM and ERP have LPSURYHGWUDQVDFWLRQDOHI¿FLHQFLHVWKHODFNRI systems and process integration and the resultant lack of end-to-end value chain visibility continue WRKLQGHUFROODERUDWLYHDQGPXWXDOO\EHQH¿FLDO partnerships. EBusiness processes require transparent information and knowledge transparency among business partners. The vision is to achieve dynamic collaboration among internal personnel, business partners, and customers throughout a trading community, electronic market, or other form of exchange characterized by the seamless and transparent exchange of meaningful information and knowledge. The resultant view is similar to the notions of real-time supply chains and infomediary-based e-marketplaces, where the virtual supply chain is viewed as an inter-organizational information system with seamless and transparHQWÀRZVRILQIRUPDWLRQHQDEOHGWKURXJKKLJKO\ integrated systems (Rabin, 2003). The timely sharing of accurate information DPRQJFROODERUDWLQJ¿UPVDQGWUDQVSDUHQF\LQ WKHVXSSO\FKDLQLVFULWLFDOIRUHI¿FLHQWZRUNÀRZV that support the business processes (Davenport & Brooks, 2004). Information technologies can help streamline business processes across organizations and improve the performance of the value chain by enabling better coordination of LQWHU¿UPSURFHVVHVWKURXJK%%HPDUNHWSODFHV (Dai & Kauffman, 2002). The lack of integration

Semantic E-Business

of information and knowledge in systems that manage business processes is a stumbling block in enterprise innovation (Badii & Sharif, 2003). The consequent lack of transparencies in information ÀRZ DFURVV WKH YDOXH FKDLQ FRQWLQXH WR KLQGHU productive and collaborative partnerships among ¿UPVLQ%%HPDUNHWSODFHV&XUUHQWHFKDLQV suffer from paucity in information transparency spanning all participant e-marketplaces in the e-supply chain. Integrative systems that support the transparent exchange of information and knowledge can enhance collaboration across organizational value chains by extending support for a range of eBusiness processes and provide DJJUHJDWHRUSURGXFWVSHFL¿FFXPXODWLYHGHPDQG or supply conditions in a single e-marketplace and across multiple upstream or downstream links in the e-chain (Singh, Salam, & Iyer, forthcoming). Such systems must provide collaborating value chain partners with intelligent knowledge services capabilities for the seamless and transparent exchange of volatile and dynamic market information, both synchronously and asynchronously. Reductions in transaction coordination costs gained through the effective application of information technologies partly explain the increasing use of markets over hierarchies by organizations to coordinate economic activities (Malone, Yates, & Benjamin, 1987). E-marketplaces offer valueDGGHGVHUYLFHVE\OHYHUDJLQJLQGXVWU\VSHFL¿FH[pertise through deciphering complex information and contribute to transaction cost reductions. A survey by Davenport, Brooks, and Cantrell (2001) RQ%%HPDUNHWSODFHVLGHQWL¿HGODFNRIWUXVWDV a primary barrier for e-marketplace growth. Much of the risk associated with lack of trust can be UHGXFHG³DVLQIRUPDWLRQEHFRPHVPRUHFRGL¿HG standardized, aggregated, integrated, distributed, and shaped for ready use” (Davenport et al., 2001). 7KH\DOVRVWDWHWKDW³currently achieved e-marketplace integration levels fall far below what is necessary.” Investments in the IT infrastructure of the e-marketplace can further the effective use of process coordination and communication between

SDUWLFLSDQWV:KLOHDVVHWVSHFL¿FWHFKQRORJ\LQvestments serve to reduce the transaction cost, this OHDGVWRVLJQL¿FDQWLQFUHDVHVLQFRVWRIVZLWFKLQJ partners. However, when such investments are made by the e-marketplace, the transaction cost UHGXFWLRQVFDQEHQH¿WHPDUNHWSODFHSDUWLFLSDQWV while the increase in switching costs applies to switching from an e-marketplace participant to DQRQSDUWLFLSDQW¿UP Integrative technologies that support the transparent exchange of information and knowledge make it easier for the development of inter-organizational relationships through enhanced adaptability and standardization of content representation. This is increasingly prevalent through efforts such as ebXML (www.ebXML.org), Web services, and systems architecture standards, which allow standardization of content representation, with implications for technology adaptation and enterprise applications integration (Davenport & %URRNV %\GH¿QLQJWKHVWDQGDUGVIRUDGDSWability and standardization, e-marketplaces can KHOSGH¿QHWKHLQIRUPDWLRQWHFKQRORJ\VWDQGDUGV that are in use by all participant organizations, allowing for easy interoperability and integration of key systems of participant organizations. In this regard, e-marketplaces are viewed as interorganizational information systems that allow SDUWLFLSDQW ¿UPV WR LQWHJUDWH WKHLU LQIRUPDWLRQ technologies in a Semantic eBusiness architecture that facilitates transparent information exchange (Choudhury, 1997).

SEMANTIC EBUSINESS VISION AND APPLICATIONS Semantic eBusiness applies fundamental work done in semantic Web technologies, knowledge management, intelligent agent systems, and Web services to support the transparentÀRZRI knowledge, content, and know-how, and enable semantically enriched collaborative eBusiness processes. Institutional trust among the collab-

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orative partners engaged in Semantic eBusiness processes, as well as information assurance of all ÀRZVEHWZHHQLQWHJUDWHGV\VWHPVLQWKH6HPDQWLF eBusiness network, is essential to the adoption of the vision. Semantic eBusiness requires a trusted and secure environment. Organizations develop descriptions of their business processes and business rules using semantic knowledge representation languages, such as OWL, in a format that allows for reasoning by intelligent software agents. %XVLQHVVSURFHVVHVFRQVLVWRIZRUNÀRZGHVFULStions that describe individual tasks at an atomic transactional level. At this transactional level, the individual services offered by organizations can be described using semantic languages. In addition, product ontologies and meta-ontologies describe the relationships between the various resources utilized, required, or created by an organization in the Semantic eBusiness network. The Semantic

eBusiness framework (Figure 3) utilizes (existing) information technology infrastructure, including Web services architecture to provide the transport infrastructure for messages containing semantic content. The application of Semantic Web technologies to enable Semantic eBusiness provides the organizations the means to design collaborative and integrative, inter- and intra-organizational business processes and systems founded upon the seamless exchange of knowledge. Semantic eBusiness architectures can enable transparent information and knowledge exchange, and intelligent decision support to enhance online eBusiness processes. It can also help organizaWLRQV¿OOWKHFKDVPWKDWH[LVWVLQWKHDGDSWDWLRQ of emerging technologies to enable and enhance business processes through the use of distributed heterogeneous knowledge resources. The concept

Figure 3. Semantic eBusiness utilizes Semantic Web technologies and existing information technology LQIUDVWUXFWXUHIRUWUDQVSDUHQWLQIRUPDWLRQDQGNQRZOHGJHÀRZVLQDVHFXUHDQGWUXVWHGHQYLURQPHQW

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Semantic E-Business

of Semantic eBusiness is potentially applicable to industries with an online presence. Candidates for applications in business include supply chain management and e-marketplaces. In addition, PXOWLSOHQRWIRUSUR¿WDQGJRYHUQPHQWSURFHVVHV are also potential application areas, including the health care industry for improving the management of medical records and e-government applications for improving services offered online to citizens. The following scenarios present some areas where we believe Semantic eBusiness can enhance information and knowledge exchange and LPSURYHWKHHI¿FDF\RIH%XVLQHVVSURFHVVHV

Potential Semantic EBusiness Applications Supply Chain Management Supply chain management (SCM) is a common strategy employed by businesses to improve organizational processes to optimize the transfer of goods, information, and services between buyers and suppliers in the value chain (Poirier & Bauer, 2000). A fundamental ongoing endeavor of SCM is to foster information transparency (availability of information in an unambiguously interpretable format) that allows organizations to coordinate VXSSO\FKDLQLQWHUDFWLRQVHI¿FLHQWO\LQG\QDPLF market conditions. A standard ontology for all trading partners is necessary for seamless transformation of information and knowledge essential for supply chain collaboration (Singh et al., forthcoming). Increasing complexity in supply chains make the timely sharing of accurate information among collaborating partners a critical element LQ WKH HI¿FLHQF\ RI ZRUNÀRZV DQG H%XVLQHVV processes. Information and knowledge exchange facilitated through semantic Web technologies enable the creation of global information partnerships across the entire supply chain. Organizations embracing such paradigms can sustain their competitive advantages by having an effective DQGHI¿FLHQWHVXSSO\FKDLQDQGUHDOL]HEHQH¿WV

such as reduced cycle times, lower product costs, reduced inventory, better quality decision making, and improved customer service.

E-Marketplaces Infomediaries perform a critical role in bringing together buyers and suppliers in the e-marketplace and facilitating transactions between them. A detailed description of the value-added activities provided by infomediaries in e-marketplaces can be found in Grover and Teng (2001). The infomediary adds value through its role as an enterprise system hub responsible for the critical integration RIWKHLQIRUPDWLRQÀRZVDFURVVSDUWLFLSDQW¿UPV (Davenport & Brooks, 2004). Infomediaries become vital repositories of knowledge about buyers, suppliers, and the nature of exchanges among them including the past experiences of other buyers’ reliability and trustworthiness of the supplier. They provide independent and observed post-transaction assessment of the commitments of the individual buyers and sellers to facilitate the development of coordination structures, leading to collaborative relationships in e-supply chains. The integration of intelligence and knowledge within and across e-marketplaces can enhance the coordination of activities among collaborating ¿UPVDFURVVHPDUNHWSODFHV6LQJKHWDO  Collaborations create information partnerships between organizations to enable the delivery of products and services to the customer in an HI¿FLHQWPDQQHU6XFKLQIRUPDWLRQSDUWQHUVKLSV are founded upon the transparent exchange of information and knowledge between collaborating organizations in a dynamic manner across participants in the value chain.

Healthcare Healthcare delivery is very complex and knowledge dependent. Information systems employed for healthcare store information in very disparate and heterogeneous clinical information system

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data repositories. Pollard (2004) states that knowledge management activities in healthcare center on acquiring and storage of information, and lacks the ability to share and transfer knowledge across systems and organizations to support individual user productivity. In addition the data acquired and stored in islands clinical information systems are in multiple formats. Common vocabulary to represent data and information LV QHHGHG IRU HI¿FLHQW NQRZOHGJH PDQDJHPHQW (Desouza, 2002). The focus has been on building independent applications to make these systems talk to each other. The need is for models to integrate the data and knowledge in these disparate systems for effective knowledge sharing and use (Sittig et al., 2002). To serve the needs, relevant patient-centered knowledge must be accessible to the person supplying care in a timely manner LQ WKH ZRUNÀRZ ,QWHURSHUDELOLW\ VWDQGDUGV RI emerging Semantic Web technologies can enable health information integration, providing the transparency for healthcare-related processes involving all entities within and between hospitals, as well as stakeholders such as pharmacies, insurance providers, healthcare providers, and clinical laboratories. Further research on using Semantic Web technologies is needed to deliver knowledge services proactively for improved decision making. Such innovations can lead to enhanced caregiver effectiveness, work satisfaction, patient satisfaction, and overall care quality in healthcare (Eysenbach, 2003).

organizational boundaries and infrastructures, there is a critical need to manage the knowledge and information resources stored in these disparate systems (Teswanich, Anutariya, & Wuwongse, 2002). Emerging Semantic Web technologies have the ability to enable transparent information and knowledge exchange to enhance e-government processes. Klischewski and Jeenicke (2004) examine the use of ontology-driven e-government applications based on Semantic Web technologies to support knowledge management related to e-government services. Further research to investigate requirements, design and develop systems, and examine success factors for systems development employing Semantic Web technologies for effective knowledge management within e-government services is needed.

ORGANIZATIONS AND RESEARCH GROUPS FOSTERING A SEMANTIC EBUSINESS VISION As research in the foundation technologies for the Semantic Web develops, the application of these technologies to enable Semantic eBusiness is of increasing importance to the professional and academic communities. In this section we would like to inform the readers of several organizations that are involved in furthering research related to Semantic eBusiness.

E-Government

Association for Information Systems (AIS) (www.aisnet.org)

E-government refers to the use of Internet technologies for the delivery of government services to citizens and businesses (www.Webster-dictionary. RUJGH¿QLWLRQ(*RYHUQPHQW 7KHDLPRI(JRYernment is to streamline processes and improve interactions with business and industry, empower citizens with the right information, and improve WKHHI¿FLHQF\RIJRYHUQPHQWPDQDJHPHQW*LYHQ that e-government services extend across different

A professional organization, the Association for Information Systems (AIS) was founded in 1994 to serve as the premier global organization for academics specializing in information systems. This organization has formed several special interest JURXSV6,*V WRSURYLGHVXEVWDQWLDOEHQH¿WVWR,6 students, academics, and practitioners by helping members exchange ideas and keep up to date on common research interests. The following SIGs

54

Semantic E-Business

FRQWULEXWH VLJQL¿FDQWO\ WR DGYDFLQJ 6HPDQWLF eBusiness research:

•

•

•

Special Interest Group on Semantic Web and Information Systems—SIG-SEMIS (www.sigsemis.org): SIG-SEMIS’ goal is to cultivate the Semantic Web vision in IS. The main areas of emphasis in this SIG are: Semantic Web, Knowledge Management, Information Systems, E-Learning, Business Intelligence, Organizational Learning, and Emerging Technologies. The SIG aims WR ³FUHDWH NQRZOHGJH FDSDEOH RI VXSSRUWing high-quality knowledge and learning experience concerning the integration” of the above main areas. This integration will provide the participants of the SIG an opportunity to create and diffuse knowledge concerning the issues of Semantic Web in the IS research community. Special Interest Group on Agent-Based Information Systems—SIG-ABIS (www. agentbasedis.org): SIG-ABIS aims to DGYDQFH NQRZOHGJH ³LQ WKH XVH RI DJHQW based information systems, which includes complex adaptive systems and simulation experiments, to improve organizational SHUIRUPDQFH6,*$%,6SURPLVHVWR¿OODQ H[LVWLQJJDSLQWKH¿HOGDQGWKHUHIRUHLVPRUH focused on the strategic and business issues with agent technology and less on the artifact itself, such as computational algorithms, which are well investigated by computer science related research groups.” Special Interest Group on Ontology Driven Information System—SIG-ODIS (aps.cabit. wpcarey.asu.edu/sigodis/): The objective of 6,*2',6LVWRSURYLGH³DXQLI\LQJLQWHUnational forum for the exchange of ideas DERXWWKH¿HOGRIRQWRORJ\DVLWUHODWHVWR design, evaluation, implementation, and study of ontology driven information systems.” In helping develop awareness and foster research about the role and impact

•

of computational ontologies on the design, development, and management of business information systems, SIG-ODIS also strives to build bridges between the IS discipline and other related disciplines, such as computer science, information science, philosophy, linguistics, and so forth, that pursue research in the broad area of computational ontologies. Special Interest Group on Process Automation and Management—SIG-PAM (www.sigpam.org): SIG-PAM’s objective LV WR DGGUHVV WKH ³QHHG RI ,6 UHVHDUFKers and practitioners for information and knowledge sharing in the areas of process design, automation, and management in both organizational and inter-organizational contexts.” The SIG collaborates with other QRWIRUSUR¿WRUJDQL]DWLRQVWKDWKDYHUHODWHG focus on process theories and applications, VXFKDVWKH:RUNÀRZ0DQDJHPHQW&RDOLWLRQ :I0& WKH:RUNÀRZDQG5HHQJLQHHULQJ International Association (WARIA), and the Computer Supported Collaborative Work (CSCW) Conference.

Hewlett-Packard (HP) Labs Semantic Web Research (www.hpl.hp.com/ semWeb/) The HP Labs Semantic Web research group recognizes that Semantic Web technologies can enable QHZDQGPRUHÀH[LEOHDSSURDFKHVWRGDWDLQWHJUDtion, Web services, and knowledge discovery. The HP Labs’ investment in the Semantic Web consists of the development of Semantic Web tools (such as Jena, a Java framework for writing Semantic Web applications) and associated technology, complemented by basic research and application-driven research. HP is also part of several collaborative ventures, including involvement in W3C initiatives (RDF and Web ontologies working groups) and European projects (Semantic Web Advanced Development Europe—SWAD-E and Semantic Web-enabled Web Services—SWWS). 55

Semantic E-Business

World Wide Web Consortium’s Semantic Web Initiative (www. w3.org/2001/sw/) The main goal of the W3C Semantic Web initiative is to create a universal medium for the exchange RIGDWD³,WLVHQYLVDJHGWRVPRRWKO\LQWHUFRQQHFW personal information management, enterprise application integration, and the global sharing RIFRPPHUFLDOVFLHQWL¿FDQGFXOWXUDOGDWD7KH W3C Semantic Web activity has been established to serve a leadership role in both the design of VSHFL¿FDWLRQVDQGWKHRSHQFROODERUDWLYHGHYHOopment of enabling technology.” In addition to these organizations, the formation of this new journal, International Journal on Semantic Web and Information Systems, provides an opportunity for the publication and exchange of research discussions of the Semantic Web in the context of information systems.

SUMMARY AND RESEARCH DIRECTIONS The realization of representing knowledge-rich processes is possible through the broad developments in the Semantic Web initiative of the World :LGH :HE &RQVRUWLXP :H GH¿QHG 6HPDQWLF H%XVLQHVVDV³an approach to managing knowledge for coordination of eBusiness processes through the systematic application of Semantic Web technologies.” Advances in Semantic Web technologies—including ontologies, knowledge representation, multi-agent systems, and the Web services architecture—provide a strong theoretical foundation to develop system architecture that enables semantically enriched collaborative eBusiness process. Semantic eBusiness architecture enables transparent information and knowledge exchange and intelligent decision support to enhance online eBusiness processes. Developments in the availability of content and business logic on-demand, through technologies

56

such as Web services, offer the potential to allow organizations to create content-based and logicdriven information value chains, enabling the needed information transparencies for Semantic eBusiness processes. Research is needed to understand how conceptualizations that comprise business processes can be captured, represented, shared, and processed by both human and intelligent agent-based information systems to create transparency in eBusiness processes. Further work on these dimensions is critical to the design of knowledge-based and intelligence-driven eBusiness processes in the digital economy. Research is also needed in the development of business models that can take advantage of emergent technologies to support collaborative, knowledge-rich processes characteristic of Semantic eBusiness. Equally important is the adaptation and assimilation of emergent technologies to enable Semantic eBusiness processes, and the contribution to organizations’ value propositions. Topics of research directions include the development of innovative, knowledge-rich business models that enhance collaborations in eBusiness processes, and innovative technical models that enable the vision of Semantic eBusiness. One of our current research initiatives involves developing models for the representation of knowledge, using ontologies and intelligent agents for semantic processing of cross-enterprise business processes over heterogeneous systems. For the Semantic Web to be a vibrant and humane environment for sharing knowledge and collaborating on a wide range of intellectual enterprises, the W3C must include in its Semantic Web initiatives research agenda the creation of policy-aware infrastructure, along with a trust language for the Semantic Web that can represent complex and evolving relationships.

REFERENCES Baader, F., Calvanese, D., McGuinness, D., Nardi, D., & Patel-Schneider, P.F. (2002). The description

Semantic E-Business

logic handbook: Theory, implementation, and applications. Cambridge University Press.

Fensel, D. (2000). IEEE Intelligent Systems, (November/December), 67.

Badii, A., & Sharif, A. (2003). Information management and knowledge integration for enterprise innovation. Logistics Information Management, 16(2), 145-155.

Grover, V., & Davenport, T.H. (2001). General perspectives on knowledge management: Fostering a research agenda. Journal of Management Information Systems, 18(1).

%HDP++ 7KHLQ¿QLWHUHVRXUFH&UHDWing and leading the knowledge enterprise. The Academy of Management Executive, 12(3).

Grover, V., & Teng, J.T.C. (2001, April). E-commerce and the information market. Communications of the ACM, 44(4), 79-86.

Berners-Lee, T., Hendler, J., & Lassila, O. (2001). The Semantic Web. 6FLHQWL¿F$PHULFDQ, (May), 34-43.

Gupta, B., Iyer, L., & Aronson, J.E. (2000). Knowledge management: A taxonomy, practices and challenges. Industrial Management and Data Systems, 100(1), 17-21.

Chiu, C. (2000). Re-engineering information systems with XML. Information Systems Management, 17(4). Choudhury, V. (1997). Strategic choices in the development of interorganizational information systems. Information Systems Research, 8(1), 1-24. Dai, Q., & Kauffman, R.J. (2002). Business models for Internet-based B2B electronic markets. International Journal of Electronic Commerce, 6(4), 41-72.

Hendler, J. (2001). Agents and the Semantic Web. IEEE Intelligent Systems, (March/April), 30-37. Holsapple, C., & Singh, M. (2000). Toward a uni¿HGYLHZRIHOHFWURQLFFRPPHUFHHOHFWURQLFEXVLness, and collaborative commerce: A knowledge management approach. Knowledge and Process Management, 7(3), 159. Jennings, N.R., & Wooldridge, M. (1998). Agent technology: Foundations, applications, and markets. London: Springer-Verlag.

Davenport, T.H., Brooks, J.D., & Cantrell, S. (2001, January). B2B e-market survey: Summary RI¿QGLQJV:KLWH3DSHU$FFHQWXUH,QVWLWXWHRI Strategic Change.

Kishore, R., Sharman, R., & Ramesh, R. (2004). Computational ontologies and information systems: I. foundations. Communications of the Association for Information Systems, 14, 158-183.

Davenport, T.H., & Brooks, J.D. (2004). Enterprise systems and the supply chain. Journal of Enterprise Information Management, 17(1), 8-19.

Klein, M., Fensel, D., van Harmelen, F., & Horrocks, I. (2001). The relation between ontologies and XML schemas. Electronic Transactions on $UWL¿FLDO ,QWHOOLJHQFH (7$, , Linköping Electronic Articles in Computer and Information Science, 6(4).

Desouza, K.C. (2002). Knowledge management in hospitals: A process oriented view and staged look at managerial issues. International Journal of Healthcare Technology & Management, 4(6), 478-497. Eysenbach, G. (2003). The Semantic Web and healthcare consumers: A new challenge and opportunity on the horizon? International Journal of Healthcare Technology & Management, 5(3/4/5), 194-212.

Klischewski, R., & Jeenicke, M. (2004). Semantic Web technologies for information management within e-government services. Proceedings of the 37th Hawaii International Conference on System Sciences.

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Malone, T.W., Yates, J., & Benjamin, R.I. (1987). Electronic markets and electronic hierarchies. Communications of the ACM, 30(6), 484-497.

Rabin, S. (2003). The real-time enterprise, the real-time supply chain. Information Systems Management, 20(2), 58-62.

McIlraith, S., Son, T.C., & Zeng, H. (2001). Semantic Web services. IEEE Intelligent Systems, (March/April), 46-53.

Singh, R., Salam, A.F., & Iyer, L. Intelligent infomediary-based e-marketplaces: Agents in e-supply chains. Communications of the ACM, (forthcoming).

Muller, H.J. (1997). Towards agent systems engineering. Data and Knowledge Engineering, 23, 217-245. O’Leary, D. (1998). Knowledge management systems: Converting and connecting. IEEE Intelligent Systems and Their Applications, 13(1).

Singh, R., Iyer, L.S., & Salam A.F. (2003). Web service for knowledge management in e-marketplaces. eService Journal, 3(1). Shoham, Y. (1993). Agent oriented programming. -RXUQDORI$UWL¿FLDO,QWHOOLJHQFH, 60(1), 51-92.

Papazoglou, M.P. (2001). Agent oriented technology in support of eBusiness: Enabling the development of intelligent business agents for adaptive, reusable software. Communications of the ACM, 44(4), 71-77.

Sittig, D.F., Hazlehurst, B.L., Palen, T., Hsu, J., Jimison, H., & Hornbrook, M.C. (2002). A clinical information system research agenda for Kaiser Permanente. The Permanente Journal, 6(3), 41-44.

Poirier, C.C., & Bauer, M. (2000). E-supply chain: Using the Internet to revolutionize your business. Berrett-Koehler.

Staab, S., Studer, R., Schnurr, H.P., & Sure, Y. (2001). Knowledge processes and ontologies. IEEE Intelligent Systems, (February).

Pollard, D. (2004). Knowledge integration leading to personal knowledge management: Enabling better life science and medical product management and health delivery. Knowledge Management Blog—The Ferryman, (June 15). Retrieved September 2004 from barryhardy.blogs.com/theferryman/2004/06/knowledge_integ.html.

Teswanich, W., Anutariya, C., & Wuwongse, V.  8QL¿HGUHSUHVHQWDWLRQIRUHJRYHUQPHQW knowledge management. Proceedings of the 3rd International Workshop on Knowledge Management in E-Government (pp. 199-209), University of Linz and University of Roskilde. Wiig, K.M. (1993). Knowledge management foundations. Schema Press.

This work was previously published in International Journal on Semantic Web & Information Systems, Vol. 1, No. 1, edited by A. Sheth and M. Lytras, pp. 19-35, copyright 2005 by IGI Publishing (an imprint of IGI Global).

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59

Chapter 1.5

The Evolution of ERP and its Relationship with E-Business S. A. Alwabel University of Bradford, UK M. Zairi University of Bradford, UK A. Gunasekaran University of Massachusetts - Dartmouth, USA

ABSTRACT Every technical invention is initially designed and eventually applied to solve a real-world problem. The evolution of Enterprise Resource Planning (ERP) is no exception. Owing to its well-organised success to effectively integrate isolated multiple

INTRODUCTION The rapid change in technology and other skills DGGHGWRFXVWRPHUVUHTXLULQJKLJKO\VSHFL¿FDQG customised products has led to the need for far JUHDWHU FRRSHUDWLRQ ZLWKLQ DQG EHWZHHQ ¿UPV This increasing pressure requires companies to explore a reliable mechanism that makes it easier

to save, store, and share useful information. Consequently, accounting information system (AIS) was developed to offer a good foundation for control information and knowledge to contribute to a company’s success (Wilkinson, 2000). AIS can be, according to Romney and Steinbart (1999), referred to as a transaction processing sysWHPEHFDXVHLWRQO\GHDOWZLWK¿QDQFLDOGDWDDQG accounting transactions. It was mainly used as a reporting tool to perform functions such as payroll and invoicing. As the power and sophistication of information technology (IT) continue to grow up, the coverage potentials of AIS have become JUDGXDOO\ PRUH LQDGHTXDWH DQG QRW VXI¿FLHQW for business needs (Romney & Steinbart, 1999). With the growing requirements for information RWKHUWKDQ¿QDQFLDOGDWDRUJDQLVDWLRQVEHJDQWR develop additional information systems. However,

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

The Evolution of ERP and its Relationship with E-Business

the existence of multiple systems creates various struggles and inadequacies (Romney & Steinbart, 1999). Very often, the same data, for instance a sale record, must be stored by more than one system. Therefore, the term ERP (enterprise resource planning) emerged, which extends AIS to cover areas like product planning, logistics, accounting DQG¿QDQFLDOVHUYLFHVKXPDQUHVRXUFHVDQGVDOHV distribution. ERP or information systems integration in general are doubtlessly among the most central topics arising at the interface of information systems (IS) and accounting within the past 20 \HDUV %KDWW   VWDWHV WKDW ³%\ DFFHVVLQJ enterprise-wide information from databases, IS integration is providing numerous opportunities to coordinate organisational activities by facilitating communication and information exchange across departments without the need to go up and down the vertical chain of command. The access to timely, accurate and consistent information is crucial in business process improvement and accounting. IS integration, through communication networks and database systems, enables organisations to create and sustain process improvement through timely retrieval of consistent and accurate information.” ERP initiated from the large packaged application software that had been widespread since WKH ¶V $PRQJ WKH ¿UVW SDFNDJHG EXVLQHVV applications available was material requirement planning (MRP), introduced in the 1960’s and proposed by Joseph Orlicky, who was regarded as the father of MRP in 1960 in the U.S. (Vollmann, Berry, & Whybark, 1992). During the 1970’s, the MRP packages were extended, and further applications were added (Chung & Snyder, 2000). The extended resulted in the introduction of manufacturing resource planning (MRP II) systems; this development has been continued (Koh, Jones, Saad, Arunachalam, & Gunasekaran, 2000). Moreover, these systems later evolved to enterprise resource planning (ERP) systems, a term coined by the Gartner Research Group in

60

1992 and the name can probably be derived from the MRP and MRPII systems (Klaus, Rosemann, & Gable, 2000). ERP systems are highly-integrated software packages (Holland. Light, & Kawalek, 1999). However, ERP systems, like all information technology, are rapidly changing. During the 1980’s, this was abandoned and replaced by the client-server architectures, and now newly-released Web-enabled versions have become more and more widespread (Markus & Tanis, 2000). This paper will mainly focus on the evolution of ERP in its historical context. 7KLV ZLOO EH FODUL¿HG E\ ¿UVW H[SODLQLQJ 053 DQG053,,V\VWHPVDVD¿UVWDQGVHFRQGSKDVH of ERP systems. Moreover, reasons why MRP and MRPII implementation fail as well as their functions and hierarchy will be investigated to get a clear overview of ERP evolution. Second, ERP’s feature, advantages, and disadvantages as well as reasons why ERP implementation fails will be discussed. Last, the relationship between ERP and e-business will be presented.

MATERIALS REQUIREMENT PLANNING (MRP) SYSTEMS Materials Requirements Planning (MRP, or MRP-I) system was launched in the mid-1960s and quickly became popular for providing a logical, easily understood method for determining the number of parts, components, and materials needed for the assembly of each end item in production. As computer power grew and demands for software applications increased, MRP systems evolved to consider other resources besides materials. Software modules were added to include functions such as scheduling, inventory control, ¿QDQFHDFFRXQWLQJDQGDFFRXQWVSD\DEOH MRP-I system is a computer-based system for managing inventory and production schedules. This approach to materials management applies to large job-shop situations in which many products are manufactured in periodic lots in several

The Evolution of ERP and its Relationship with E-Business

processing steps (Bedworth & Bailey, 1987). MRP and Push systems are often used interchangeably. Conceptually, MRP can be viewed as a method for the effective planning of all resources of a manufacturing organisation (Russell & Taylor, 1998). According to Daft (1991), MRP can be GH¿QHGDVD³GHSHQGHQWGHPDQGLQYHQWRU\SODQning and control system that schedules the exact amount of all materials required to support the GHVLUHGHQGSURGXFW´³,WLVDQLQYHQWRU\RUGHULQJ and time-phased scheduling technique, which uses bill of material, inventory data, and the master production schedule to calculate requirements for material and determine when to release the material replenishment order” (Torkzadeh & Sharma, 1991). Thus, for the purpose of this SDSHU053FDQEHGH¿QHGDVDFRPSXWHUEDVHG planning, scheduling, and control system that gives management a tool to plan and control its manufacturing activities and supporting operations obtaining a higher level of customer service while reducing costs.

The main function of MRP according to Ballou (1999) is to monitor stocks and to determine which material the company needs, in what quantity, at what time, and to create the corresponding order proposals automatically. In MRP, the system compares available warehouse stock orders scheduled receipts from purchasing or production with planned requirements in the net requirements calculation. In the case of a material shortage, that is, if available stock is less than the quantity required, the system creates an order proposal (Ballou, 1999). The objectives of MRP are similar to those of any inventory management system. These objectives are improving customer service, minimising inventory investment, and maximising production RSHUDWLQJHI¿FLHQF\&KDVH $TXLODQR  According to Torkzadeh and Sharma (1991), MRP is an inventory control and production planning system designed for ordering and scheduling dependent demand of inventory, which includes the following components: master schedule, bill RIPDWHULDODQGLQYHQWRU\UHFRUG¿OH

The Purpose of MRP Systems Advantages of MRP Systems MRP is primarily used for scheduling high-value commissioned parts, materials, and supplies when demand is reasonably well known (Ballou, 1999). Ballou (1999) further states that precise timing of PDWHULDOÀRZVWRPHHWSURGXFWLRQUHTXLUHPHQWVLV the principle behind MRP. According to Chase and Aquilano (1995), the MRP functionality within organisations enables: •

•

•

full materials planning to ensure the required inputs into the manufacturing process are available to meet demand from order proposals; planning to be carried out for a single item if the MRP controller wants to plan a particular material; and a bill of materials sequencing the assembly SDUWVRIWKH¿QDOSURGXFW

Material requirements planning (MRP) methods try to avoid, as much as possible, carrying items in inventory through precise timing of material ÀRZVWRPHHWUHTXLUHPHQWV%DOORX ,WLV a preferred method when demand is reasonably known due to the uncertainty of the forecasting component. If demand is forecasted to change, MRP planning adapts to this new level of requirement. Nahmias (1997) says that MRP may be considered a top-down planning system in that all production quantity decisions are derived from demand forecasts. Coyle, Bardi, and Langley (1996) consider a principal advantage of MRP is the ability to maintain reasonable safety stock levels and minimise or eliminate inventories wherever possible. In addition, other advantages, according to Chase and Aquilano (1995), include the following:

61

The Evolution of ERP and its Relationship with E-Business

• • •

identify process problems long before they occur, base production schedules on actual demand, and coordinate materials ordering across the ¿UP

Disadvantages of MRP Systems Nahmias (1997) states that, in a push system, items are produced based on a plan or forecast and pushed to the next level. Simchi-Levi, Kaminsky, and Simchi-Levi (2000) state the following problems that are associated with push systems: 1.

2.

3.

Push systems are slow to react and sometimes even unable to react to changes in the market place. Product obsolescence may occur in a push system as consumer preferences and demand changes for a certain product. Inventory and carrying costs are generally higher in a push system (Simchi-Levi et al., 2000).

However, the trade-off in costs associated with MRP concepts is between having the materials arrive before they are needed, in which case they are subject to a holding charge, and the expected cost of the materials arriving after they are needed so the materials are subject to a late charge. According to Ballou (1999), the challenge of scheduling models (MRP) is to determine the optimal time to release the request for materials ahead of requirements. Moreover, a major problem with MRP modelling is that not all uncertainties are taken into account. Uncertainties include changes in demand that were not captured by the forecast and the variance in lead-times. Ballou (1999) further adds that the challenge of MRP is WR¿QGWKHRSWLPDOUHOHDVHWLPHIRUPDWHULDOVWR meet requirements. There is uncertainty associated with the release time as the required time for the transportation component of the supply chain may vary between points. 62

Reasons for the Failures Many authors state that struggles associated with MRP systems to be implemented correctly, to a certain extent, with organisational and behavioural factors (Chase & Aquilano, 1995; Turbide, 1995). Yet, it seems to be generally agreed that failure of an MRP installation can be traced to problems such as:

Lack of Top Management Commitment MRP system requires a major commitment from top management in order for it to be successful. This means not only the commitment of resources, but also the commitment of top management’s time to ensure the right coordination among the various functions. A well-functioning schedule FDQXVHWKH¿UP¶VDVVHWVHIIHFWLYHO\DQGHI¿FLHQWO\ DQGWKLVLQVHTXHQFHZLOOLQFUHDVHWKH¿UP¶VSURIits. Thus, MRP should be acknowledged by top management as a planning tool with particular UHIHUHQFH WR SUR¿W UHVXOWV &KDVH  $TXLODQR 1995, p. 595). According to Zairi (2000): The key drivers for adding optimum value to society DQGWKHFRPPXQLWLHVLQZKLFKVSHFL¿FEXVLQHVV organisations operate are through having strong commitment to corporate and social governance, having an open dialogue with external stakeholders and having the determination to achieve environmental sustainability.

Intensive Executive Education is Needed In nearly every study conducted, the lack of proper training is considered a key barrier to MRP implementation. Raysman (1981) comments that lack of understanding about systems is frequently quoted as a reason for failure of companies endeavours. Sum and Yang (1993) recognised that the lack of MRP expertise and training were main problems facing companies to implement

The Evolution of ERP and its Relationship with E-Business

MRP. In a desire to convert to the new system quickly, there is often an underperformance in the training of personnel at all levels. However, proper training is required from the technical perspective as well as from the users’ perspective. Thus, the IT department within an organisation needs to entirely understand all of the technical characteristics of the system in order to provide the proper support to the business functions that use it. Simultaneously, the business functions need to recognise the different procedures for entering data and producing reports.

for the effective planning of all the resources of a manufacturing business (Higgins, Le Roy, & Tierney, 1996). It is a direct successor of the material requirements planning (MRP). MRPII LVFRQFHUQHGZLWKPDQDJLQJWKHÀRZRIPDWHULDO into, through, and out of the organisation (Arnold, 1998). Thus, MRPII is a system in which the entire production environment is evaluated to allow master schedules to be adjusted and created based on feedback from current production/purchase conditions (Bedworth & Bailey, 1987).

Functions of MRPII Systems Too Rigid The aims of the MRP system are to minimising inventory investment and maximising production RSHUDWLQJHI¿FLHQF\&KDVH $TXLODQR  thus the accuracy of the recorded levels becomes VLJQL¿FDQW&KDVHDQG$TXLODQR VWDWHWKDW ³3HUKDSVRQHRIWKHELJJHVWFRPSODLQWVE\XVHUV is that MRP is too rigid. When MRP develops a VFKHGXOHLWLVTXLWHGLI¿FXOWWRYHHUDZD\IURP the schedule if need arises.”

MANUFACTURING RESOURCE PLANNING (MRPII) SYSTEMS

The functions of MRPII according to Higgins et al. (1996) can be summarised as follows: • • •

Although MRPII is an imposing tool when used properly, there are some considerations that must be addressed for it to function effectively. •

As it was shown, the MRP contains a method for planning and procuring the materials to support production. During years of using MRP, the need for other functions arose that would, together with MRP, create an actually integrated manufacturing management system. Thus, it was done by creating a large production control system named manufacturing resources planning (MRPII).

'H¿QLWLRQRI053,,6\VWHPV Manufacturing resource planning (MRPII) sysWHPLVGH¿QHGE\WKH$PHULFDQ3URGXFWLRQDQG Inventory Control Society (APICS) as a system

7KHRSHUDWLRQDQG¿QDQFLDOV\VWHPDUHWKH same. It has simulation capabilities that enable predictions to be made beforehand. It involves every facet of business from planning to execution (Higgins et al., 1996).

•

•

7KHIXQFWLRQVZLWKLQD¿UPPXVWEHLQWHgrated. They must agree on what is being produced and in what quantities. Often, organisational boundaries are crossed when these decisions are being made. Stringent data requirements are needed for MRPII to function properly. Errors in data FDQEHPDJQL¿HGJUHDWO\E\WKHSURFHVV It is extremely important that feedback from the process is monitored regularly. Information that is shared among functions can help to reduce errors, especially with lead times (Kessler, 1991).

63

The Evolution of ERP and its Relationship with E-Business

MRPII Hierarchy The main additional functions contained in MRPII V\VWHPV ZHUH ³SXUFKDVLQJ FDSDFLW\ SODQQLQJ and master scheduling, as well as inventory and production planning” (Kessler, 1991). Along with integrating all of these additional functions in one whole, it also implemented the procedures developed during the years of using MRP to solve some problems that appeared in MRP. It resulted in a general control structure that breaks the production control problem into segments and provides a hierarchical approach (Hopp & Spearman, 2000). Hierarchy of the MRPII defers from one software package to another. One version of an MRPII hierarchy is shown in Figure 1 (Toomey, 1996). Such a structure makes it possible for a manufacturer to deal with the intimidating task of coordinating thousands of orders with hundreds of tools for thousands of end items made up of additional thousands of components. There are many different forms of the MRPII hierarchy but generally all of them constitute three major parts: long range planning, intermediaterange planning, and short-term control as shown RQWKHULJKWKDQGVLGHRIWKH¿JXUH An explanation of these is presented in the following paragraphs (Toomey, 1996). Long range planning consists of forecasting, resource planning, and aggregate planning. Forecasting predicts demands in the future, and resource planning determines the capacity requirements over the long term while aggregate planning determines the level of production. Intermediate planning provides rules for planning the different functions that take place during production. Intermediate planning forms demand management, master production schedule (MPS), rough-cut capacity planning (RCCP), bill of material (BOM), material requirements planning (MRP), and capacity requirements planning (CRP). Demand management is the process of converting the long-term aggregate forecast into a detailed

64

forecast while tracking individual customer orders. The MPS is the source of demand for the MRPII system. The MPS gives the quantity and due dates for all parts that have independent demand. The RCCP provides a quick capacity check of a few critical resources to ensure the feasibility of the MPS. The BOM provides the relationship EHWZHHQHQGLWHPV¿QLVKHGSURGXFWV DQGORZHU level items (the constituent parts of the end item). The MRP conducts allocation and performs the job release function by releasing materials onto WKHVKRSÀRRUDQGFRQYHUWLQJWKHPLQWRVFKHGXOHG receipts. Its output is the job pool, which consists of planned order releases. The CRP provides a more detailed capacity check on the production plans compared to RCCP. Short term planning serves job dispatching and input/output planning. Job dispatching provides rules for arranging the queue in front of each ZRUNVWDWLRQRQWKHSODQWÀRRUVXFKWKDWGXHGDWH integrity is maintained while machine utilisation is kept high and manufacturing times are kept low. Input/output planning provides an easy way to check releases against available capacity by monitoring the level of work in progress (WIP) at each work centre (Toomey, 1996).

Disadvantages of MRPII Systems The inaccuracy of the bill of materials and inventory database is a common problem with MRPII systems (Bayhan, 1999). Inaccurate bills of materials mean inaccurate material and capacity plans. Providing a management system that will facilitate data accuracy will likely require major adjustments in strategic management approaches (Correll, 1995). However, the MRPII systems contain a method for planning and procuring the materials to support production. During years of using MRPII, the need for other functions arose that would, together with MRPII, create an actually integrated manufacturing management system. Consequently, it was completed by creating a large production control system named

The Evolution of ERP and its Relationship with E-Business

enterprise resources planning (ERP) systems. The following section will explain this system.

Enterprise Resources Planning (ERP) Systems ERP is an extension of MRPII with additional capabilities, such as better graphical user interface, the use of relational database, fourth language generation, open system portability, and is much more integrated than MRPII (Boyle, 2000). In addition, Kapp, Latham, and Ford-Latham (2001) state that the difference between ERP and MRPII is the inclusion of a variety of manufacturing processes within ERP, in which modern ERP software is able to handle both discrete work RUGHUV DQG ÀRZ RUGHUV MXVWLQWLPH -,7  DQG MRP, electronic data interchange (EDI), and hand-entered orders. Wainewright (2002) also stated that MRP was used for tracking suppliers, ZRUNLQSURJUHVVDQGWKHRXWSXWRI¿QLVKHGJRRGV while ERP was used for all type of business with DGGLWLRQDOIXQFWLRQVLQFOXGLQJ¿QDQFLDOVSD\UROO and human resources management. According to Wallace and Kremzar (2001), ERP is far better than MRPII for three reasons: 1. 2. 3.

ERP applies a single set of resource planning tools across the entire enterprise. ERP provides real-time integration of sales, RSHUDWLQJDQG¿QDQFLDOGDWD ERP connects resource planning approaches to the extended supply chain of customers and suppliers.

'H¿QLWLRQRIERP Systems ERP is the technological backbone of electronic EXVLQHVV HEXVLQHVV  L Q W K H ED F N RI ¿ F H  ,W ZD V FRPPRQGXULQJWKHVWR¿QGWKHFRPSXWLQJ VRIWZDUHIRUWKH¿QDQFHGHSDUWPHQWZDVGLIIHUent from that used by the human resources or stores departments. According to Kalakota and 5RELQVRQ (53³RYHUFRPHVWKHLQWHJUDWLRQ

challenges posed by disconnected, uncoordinated EDFNRI¿FHDSSOLFDWLRQVWKDWKDYHRIWHQRXWOLYHG their usefulness.” 7KHUH DUH VHYHUDO (53 GH¿QLWLRQV WKDW DUH all more or less similar (Hicks, 1997). ERP is GH¿QHG DV PRGXOHEDVHG LQWHJUDWHG VRIWZDUH packages that control all the personnel, material, PRQHWDU\DQGLQIRUPDWLRQÀRZVRIDFRPSDQ\ (Granlund & Malmi, 2002). Gelinas, Sutton, and 2UDP VXJJHVWDQDOWHUQDWLYHGH¿QLWLRQIRU ERP systems as: Integrated software packages designed to provide complete integration of an organisation’s business information processing systems and all related data. These systems are conceptually based on event-driven systems concepts, which include the FDSWXULQJRIERWK¿QDQFLDODQGQRQ¿QDQFLDOGDWD to facilitate access and ad hoc analysis. 0 and u > 0. In the DF algorithm, the price of the product LVXSGDWHGEDVHGRQWKHSUR¿WLQIRUPDWLRQIURP only the last interval. Therefore, the DF strategy LVQRWYHU\HI¿FLHQWLQG\QDPLFDOO\WUDFNLQJWKH SULFHRIDSURGXFWLQDUDSLGO\ÀXFWXDWLQJPDUNHW $PRUHHI¿FLHQWWHFKQLTXHWKHmodel-optimizer (MO) algorithm described next, employs the hisWRULFDOSULFHDQGSUR¿WLQIRUPDWLRQRIWKHVHOOHUWR update the price during the next interval.

Model-Optimizer Algorithm A seller using the MO algorithm maintains its SULFHYVSUR¿WSUR¿OHRYHUWKHODVWh intervals, where h denotes the size of the history window of the seller, as shown in Figure 2 for h = 5. The MO algorithm works as follows:

396

2.

3.

Assign weights to the last h points in the SULFHYVSUR¿W SUR¿OH RI WKH VHOOHU 7KH weight of a point expresses its relevance to current market conditions. Older points are less relevant and are assigned lower weights; more recent points are more relevant and are assigned higher weights. Fit a polynomial over the h points in the history window of the seller using a nonlinear regression approach. Use a nonlinear optimization scheme, like the Nelder-Mead algorithm (Nelder & Mead, 1965), to determine the price that FRUUHVSRQGVWRWKHPD[LPXPSUR¿W

Although a large history window h might yield accurate results, it increases the time required for calculating the price for the next interval. If the seller is relatively slow in dynamically updating its price, its competitors might outperform it. Therefore, the value of h should be selected carefully to balance accuracy with rapidity in price calculation. Figure 3 shows the variation in prices over time for three competing sellers in a market using the 02DOJRULWKP$VVKRZQLQWKH¿JXUHWKHVHOOHUV using the MO algorithm engage in repeated cycles of price wars with each other. The reason for the price wars is that there are buyers with different

Dynamic Pricing for E-Commerce

)LJXUH  3ULFHYVWLPH SUR¿OH RI WKUHH VHOOHUV XVLQJWKH02DOJRULWKP

preferences in the market. For simplicity, we assume that there are only two types of buyers. •

•

A-type buyers that do not have price as the preferred attribute. Such buyers select a seller using other undetermined criteria, which we model as selection at random. B-type buyers that have price as the preferred attribute. Such buyers shop for the lowest price in the market and select the seller offering the lowest price.

Based on a survey of online markets (Clark, 2000), we assume that the ratio between A-type and B-type buyers in the market is 1:3. Because B-type buyers are greater in number, they generate the majority of the revenue for the sellers. Therefore, the sellers reduce the price of the commodity in successive intervals so that they can attract the maximum number of B-type buyers by offering the lowest price among competitors, thereby undercutting each other. This price war continues until each seller’s price reaches the production cost pc o of the commodity. Each seller KDV]HURPDUJLQDOSUR¿WLQVXFKDVFHQDULR$WWKLV point, the sellers realize that they can make more SUR¿WE\LQFUHDVLQJWKHSULFHRIWKHFRPPRGLW\WR attract A-type buyers instead of charging pc o to

attract B-type buyers. Therefore, the sellers reset their prices to a high value and another cycle of the price war ensues. The drawback of the MO algorithm is that it charges a uniform price to all buyers irrespective of the buyers’ preferences. However, this uniform pricing results in a loss of revenue from A-type buyers who are willing to pay a much higher price for a commodity than B-type buyers. Thus, the buyer population can be segmented into different clusters depending on the buyers’ preferences, and a different price can be charged for each segment. Although some online merchants such as Amazon have implemented dynamic pricing, it is yet to be adopted widely in e-commerce. The principal drawback of the dynamic pricing mechanism that those merchants have employed is that it offers identical products to different buyers at different prices, resulting in discontented buyers. A better pricing strategy would be to identify the preferred attribute of different buyers and charge a slightly different price for the product based on a buyer’s preferred attribute as described below for the multiattribute dynamic-pricing algorithm.

Multiattribute Dynamic Pricing As shown in Figure 1, a buyer compares the prices offered by different sellers based on his or her preferred product attribute. To make a competitive offer in response to a buyer’s purchase request, DVHOOHULGHQWL¿HVWKHEX\HU¶VSUHIHUUHGDWWULEXWH to offer a competitive price to the buyer on that attribute. The seller estimates the distribution fp a of a buyer’s preferences over the product attributes and then uses it to predict the preferred attribute of a buyer in response to the buyer’s purchase request. The algorithm for multiattribute dynamic pricing is based on FROODERUDWLYH¿OWHULQJ&)  which enables a seller to predict a buyer’s preIHUUHGDWWULEXWH&ROODERUDWLYH¿OWHULQJDOJRULWKPV (Kleinberg & Sandler, 2003; Sarwar, Karypis,

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Dynamic Pricing for E-Commerce

Konstan, & Reidl, 2001) collect potential buyers’ opinions or preferences on products of interest, and recommend possible products to new or returning buyers. A seller’s attribute-prediction algorithm for a potential buyer must adaptively respond to changes in the buyer’s preferences. The buyer attribute-prediction algorithm described below achieves this adaptive response by dynamically updating the seller’s model of the buyer’s attribute preferences.

Buyer Attribute-Prediction Algorithm In the buyer attribute-prediction algorithm, a seller constructs one buyer cluster for each product attribute. Suppose the seller maintains C clusters. A buyer with preferred attribute ai is placed into cluster ci with probability wi , t during interval t. These probabilities are updated dynamically in response to the buyer’s accepting or rejecting offers made by the seller. When a buyer makes a purchase request, the prediction algorithm takes the history of wi , t – s and outputs the predicted cluster (preferred attribute) for the buyer. Sophisticated, rather complex algorithms have been developed for assigning buyers to clusters, determining appropriate prices for buyers within clusters, and revising assignments and prices in response to decisions by buyers to purchase or not (Dasgupta & Hashimoto, 2004).

trade-offs between the rapidity and accuracy of such learning algorithms. A naive but fast learning algorithm might compare favorably against a complex and accurate but slow learning algorithm in a dynamic environment like a competitive online market. An interesting scenario arises when buyers’ purchase preferences are dependent on the prices being charged by sellers. In such a scenario, a seller can attempt to learn not only the temporally varying buyer purchase-preference distribution, but also the variation in that distribution. Probabilistic algorithms such as hidden Markov models and moving-target functions that estimate the dependence between temporally varying functions might be applied in such an environment.

CONCLUSION We have described different algorithms that an online seller can use for the dynamic pricing of products in a posted-price market, where the seller announces the price of a product on its Web site. We have also described techniques that an online seller can use to determine the price of a product, including multiattribute dynamic pricing and adaptive response, in which the seller’s model of the buyers’ attribute preferences is updated dynamically.

FUTURE TRENDS

REFERENCES

7KH FROODERUDWLYH¿OWHULQJ DOJRULWKP GHVFULEHG above enables online sellers to determine a buyer’s preferences over multiple product attributes and WRXSGDWHWKHSRVWHGSURGXFWSULFHVHI¿FLHQWO\LQ a competitive market. More powerful learning techniques such as Q-learning (Mitchell, 1997) and multi-objective, evolutionary algorithms (Coello, Veldhuizen, & Lamont, 2002) offer PHFKDQLVPVWRHQDEOHVHOOHUVWRVHDUFKWKHSUR¿W ODQGVFDSH PRUH HI¿FLHQWO\ 7KHUH DUH YDULRXV

Brooks, C., Gazzale, R., MacKie-Mason, J., & Durfee, E. (2003). Improving learning performance by applying economic knowledge. Proceedings of the Third ACM Conference on Electronic Commerce (pp. 252-253).

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Brown, J., & Goolsbee, A. (2000). Does the Internet make markets more competitive (NBER Working Paper No. 7996)? National Bureau of Economic Research, Massachusetts.

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Chavez, A., & Maes, P. (1996). Kasbah: An agent marketplace for buying and selling goods. Proceedings of the First International Conference on the Practical Application of Intelligent Agents and Multi-Agent Technology (pp. 75-90). Clark, D. (2000). Shopbots become agents for business change. IEEE Computer, 33, 18-21. Coello, C., Veldhuizen, D., & Lamont, G. (2002). Evolutionary algorithms for solving multi-objective problems. New York: Kluwer Academic Publishers. Dasgupta, P., & Hashimoto, Y. (2004). Multi-attribute dynamic pricing for online markets using intelligent agents. Proceedings of the Third Autonomous Agents and Multi-Agents Conference (pp. 277-284). Dasgupta, P., & Melliar-Smith, P. M. (2003). DyQDPLFFRQVXPHUSUR¿OLQJDQGWLHUHGSULFLQJXVLQJ software agents. Journal of Electronic Commerce Research, 3(3-4), 277-296. Kephart, J., Hanson, J., & Greenwald, A. (2000). Dynamic pricing by software agents. Computer Networks, 32(6), 731-752. Kleinberg, J., & Sandler, M. (2003). Convergent DOJRULWKPVIRUFROODERUDWLYH¿OWHULQJProceedings of the Fourth ACM Conference on E-Commerce (pp. 1-10). Mitchell, T. (1997). Machine learning. McGraw Hill. Nelder, J., & Mead, R. (1965). A simplex method for function minimization. Computer Journal, 7, 308-313. Sandholm, T., Suri, S., Gilpin, A., & Levine, D. (2002). Winner determination in combinatorial auction generalizations. Proceedings of the First International Conference on Autonomous Agents and Multi-Agent Systems (pp. 69-76).

Sarwar, B., Karypis, G., Konstan, J., & Reidl, J.  ,WHPEDVHGFROODERUDWLYH¿OWHULQJUHFRPmendation algorithms. Proceedings of the Tenth International WWW Conference (pp. 285-295).

Y E K TE S M R Auction: A type of market in which sellers post an initial price for the item being offered and a deadline by which the item needs to be sold. Buyers make bids on the offered item. The auction mechanism determines the dynamics of the prices bid by the buyers, the winner-determination strategy, and the bid-disclosure strategy. Common auction mechanisms include the English auction, Dutch auction, and Vickrey auction. Buyer’s Reservation Price: The reservation price of an item for a buyer is the maximum unit price that the buyer is willing to pay for an item. The buyer’s reservation price is typically drawn from a uniform or normal distribution. Collaborative Filtering: A technique that is used to collect user opinions or preferences for items of interest. A CF algorithm employs a correlation method to predict and recommend items to new or returning users based on the similarity of their interests with those of other users. E-Commerce: Consists of techniques and algorithms used to conduct business over the Internet. Trading processes such as supply-chain management, strategic purchase planning, and market mechanisms for trading commodities online are implemented using e-commerce. Intelligent Agent: Performs tasks that are given to it without continuous supervision. An agent can perceive changes in its environment and can perform actions to accomplish its tasks.

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Marketplace: A type of a market that corresponds to a central location that enables buyers and sellers to rendezvous. A marketplace is typically implemented as a blackboard where sellers post information about items being offered. Buyers make offers to sellers, and sellers respond with counteroffers. Pricebot: An intelligent agent that is used by DQRQOLQHVHOOHUWRGHWHUPLQHDSUR¿WPD[LPL]LQJ price for a product that it sells. A pricebot encapsulates the pricing algorithm used by an online seller and enables a seller to maintain an edge over its competitors in a dynamically changing market scenario.

Seller’s Production Cost: The production cost of an item for a seller includes the manufacturing and procurement costs for the item, and corresponds to the minimum price that the seller can charge for the item. Shopbot: An intelligent agent that enables online buyers to determine and compare prices and other attributes of products from different online sellers.

This work was previously published in Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, edited by M. Khosrow-Pour, pp. 247-252, copyright 2006 by Information Science Reference (an imprint of IGI Global).

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Chapter 2.6

Planning and Designing an Enterprise Wide Database Systems for E-Business Alexander Y. Yap Elon University, USA

ABSTRACT The planning and development of an enterprisewide electronic database system for e-business usually calls for the re-engineering of information processes coupled with a push toward data content standardization across the entire organization. In this chapter, the case study involves a multinational conglomerate that is in the process of integrating and Web-enabling their enterprise database systems. The objective of the system was to help engineers sift through millions of components offered by various suppliers and component manufacturers, where the end-result ZDVWRLPSURYHGWKHLQWHJUDWLRQDQGHI¿FLHQF\ of the product development, engineering design, e-sourcing, and e-procurement processes. This research is a qualitative action research study on how different organizational, social, political, and WHFKQLFDOIRUFHVLQÀXHQFHGWKHVRFLDOFRQVWUXFtion of an enterprise-wide information system.

Understanding the dynamics and power of these socio-technical forces in shaping the development environment and change process of enterprise systems is the focal point of this chapter’s discussion.

INTRODUCTION In mid-2001, Invensys, a multi-billion dollar multi-national corporation initiated a project to implement an enterprise-wide electronic database system accessible via the Web. The envisioned database was to form part of the corporation’s growing e-business system. This database was geared toward helping engineers sift through millions of electrical and mechanical components offered by various suppliers and component vendors. The database system was envisioned to be integrated with their e-procurement system, product data management systems (PDM),

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Planning and Designing an Enterprise Wide Database Systems for E-Business

enterprise resource planning (ERP) systems, and computer-aided design and manufacturing (CAD/CAM) systems. The objectives of initiating this enterpriseZLGH V\VWHP ZHUH   WR VLJQL¿FDQWO\ LPSURYH the product development process by providing Invensys engineers a better and faster means of identifying/choosing product components and cutting product development cost (by lowering product development errors caused by sub-standard components); (2) to improve e-sourcing (or the online search process for the right suppliers) by having access to a much wider range of supplier catalogs internationally and locally and be able to compare/analyze them; and (3) to improve the e-procurement process and lower procurement cost. 7KH FRQWULEXWLRQ DQG VLJQL¿FDQFH RI WKLV research is to provide meaningful insights into different socio-technical milieus and their pivotal LQÀXHQFHLQWKHVKDSLQJRIDQHZHQWHUSULVHZLGH system. Although systems requirements and functionality are delineated and envisioned at the onset of system planning, the resulting system is often implemented and developed differently from what was initially planned due to the underlying VRFLRWHFKQLFDOUHDOLWLHVWKDWVXUIDFHDQGLQÀXHQFH the systems planning as more stakeholders and systems users become involve in it. Mitigating socio-technical factors ultimately determine the path of systems development and adoption. Therefore, it is important that more studies and research are conducted to shed light on how these underlying forces come into play when shaping enterprise systems. ,QYHQV\V LV D GLYHUVL¿HG FRQJORPHUDWH WKDW manufactures and provides various products and services. In the United States, Invensys is a leading global provider of heating systems, air conditioning, building systems, and commercial refrigeration. In Europe, Invensys acquired the AVP group of companies which specializes in engineering processes (such as brewery and dairy V\VWHPV 'XHWRWKHFRQJORPHUDWH¶VGLYHUVL¿HG

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global business, it was of great interest to pursue this study to see how various Invensys subsidiarLHVZRUOGZLGHFRXOGEHQH¿WIURPRUFKDQJHZLWK a new enterprise-wide system. What was also interesting from a socio-technical research point of view was that at the time of this project’s implementation (2001-2002), Invensys Corporation just acquired Baan, a leading ERP solutions provider (Baan was re-acquired by another company in 2003). This created an underlying situation that Baan, being an enterprise solutions provider, ZRXOGKDYHFRQVLGHUDEOHLQÀXHQFHLQWKHGLUHFWLRQ of this enterprise-wide project.

RESEARCH INTEREST AND APPROACH The objective of this research is to determine the key factors that affect the planning and development of enterprise-wide systems. We were hired as information systems consultants tasked to plan and design the implementation of this project from 2001-2002. When hired, we realized it was a great research opportunity, because it would allow us to experience how an enterprise-wide systems development goes through the intricacies of a conglomerate environment. The retrospective value of this research was discussed and agreed upon with Invensys Technology vice president, Tim Matt. This research is a result of our documented analyses and insights as to how we strategically planned and tactically developed the system on a day-to-day basis considering the organizational, social, political, and environmental forces that ultimately shaped the systems design. We want to continue the discourse of Kim, Lee, and Gosain (2005) and Gosain (2004) who claimed that enterprise information systems are subjected to institutional forces and processes, and Soh and .LHQ ZKRGLVFXVVHGWKHQHHGWR¿WFXOWXUH with enterprise systems solutions or there will be gaps that could lead to mismatch between the solution and the enterprise’s needs.

Planning and Designing an Enterprise Wide Database Systems for E-Business

Since the researchers were involved in the projHFWWKLVFKDSWHULVFOHDUO\FDWHJRUL]HGDV³action research”. While quantitative methods are good for some type of research, we argue that qualitative research is the more appropriate approach to determining the casual effects of socio-technical and organizational factors in shaping the development of enterprise-wide systems. 1XPHURXVVWXGLHVLQWKH¿HOGRILQIRUPDWLRQ V\VWHPVKDYHDFNQRZOHGJHGWKDW³DFWLRQUHVHDUFK´ is a well-suited method for dissecting the complex social dimensions of IS planning and development. Previous action research methodology studies by Baskerville (1999), Wood-Harper (1985), and Hult and Lennung (1980) discussed action research as appropriate for understanding the social setting of the information systems environment. To quote Baskerville on his adoption of Hull and /HQQXQJ¶VGH¿QLWLRQRIDFWLRQUHVHDUFKKHFLWHG four major characteristics of the action research methodology: 1.

2.

3.

Action research aims at an increased understanding of an immediate social situation, with emphasis on the complex and multivariate nature of this social setting in the IS domain. Action research simultaneously assists in practical problem solving and expands sciHQWL¿F NQRZOHGJH 7KLV JRDO H[WHQGV LQWR two important process characteristics: First, there are highly interpretive assumptions being made about observation; second, the researcher intervenes in the problem setting. Action research is performed collaboratively and enhances the competencies of the respective actors. A process of participatory observation is implied by this goal. Enhanced competencies (an inevitable result of collaboration) is relative to the previous competencies of the researchers and subjects, and the degree to which this is a goal, and

4.

its balance between the actors, will depend upon the setting. Action research is primarily applicable for the understanding of change processes in social systems.

Although action research can be viewed as subjective, the intention of this research is to learn from experience, so we will not attempt to cloud it with our biases as we, too, want to fully learn from facts and events that transpired. We accepted the consulting role based on the opportunity to learn more about enterprise-wide systems planning and development. Baskerville  VWDWHGWKDW³FRQVXOWDQWVDUHXVXDOO\SDLG to dictate experienced, reliable solutions based on their independent review. Action researchers act RXWVFLHQWL¿FLQWHUHVWWRKHOSWKHRUJDQL]DWLRQLWVHOI to learn by formulating a series of experimental solutions based on an evolving, untested theory.” As academic researchers taking on the consultant’s role, we fully concur with this statement.

THEORETICAL FRAMEWORK: SOCIO-TECHNICAL FACTORS SHAPING ENTERPRISE-WIDE SYSTEMS There are internal and external factors affecting the way enterprise-wide information systems (EIS) are planned and developed. Figure 1 maps WKHVHLQÀXHQFLQJIDFWRUV$OWKRXJKVRFLRFXOWXUDO forces (Bijker, Hughes, & Pinch, 1987), political forces (Robey, 1995), and business process (Hammer & Champy, 1993) are familiar factors that we occasionally come across as shaping information systems, it is also abstract as to how these factors help shape enterprise-wide systems. Our objective LV WR LQVWDQWLDWH LWV LQÀXHQFH LQ PRUH FRQFUHWH terms with qualitative data.

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Planning and Designing an Enterprise Wide Database Systems for E-Business

Figure 1. Socio-technical factors affecting EIS implementation Internal Factors

External Factors

Corporate Politics (POLITICS)

Industry Standards (STANDARDS)

Enterprise’s Diverse Socio-Cultural Environment (CULTURE)

Enterprise Business Process and Practices (INTERNAL PROCESS)

Enterprise-Wide Information Systems

Enterprise Existing Technology Infrastructure (TECHNOLOGY)

Managerial and End-User Requirements (REQUIREMENT)

Internal Factors Managerial and End User Requirements The development of an enterprise wide system essentially starts with management and end-user inputs. The management team of an enterprise has a set of objectives for initiating an enterprise-wide system project. To avoid failure, management essentially needs to gather information about what end-users need (Cale, 1994) and dovetail those needs to the larger or broader objectives of the management team. This has to be clearly determined at the very start of the project.

Existing Technology Infrastructure For an enterprise to implement a high-level application such as Web-based database application, there has to be some basic technology infrastructure in place. So, one question is whether the corporation has the right network infrastructure and servers for running the envisioned system? A :HEDSSOLFDWLRQLVD³KLJKOHYHO´DSSOLFDWLRQ because it needs several basic technologies on

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External Business Process (EXTERNAL PROCESSES)

Technology Solutions (TECHNOLOGY AVAILABLE)

Partners’ Input (PARTNER’S CONTRIBUTION)

lower levels for it to work. Succinctly put, if an enterprise is running its database application online, the data content as well as the database system are running elsewhere, in a remote server. Without network technology infrastructure in place, it is impossible for such an application to be deployed. In addition, there has to be enough bandwidth to run the application.

Business Process and Practices The way the entire business process of a conglomerate or corporation is structured affects the manner in which enterprise-wide systems are planned, developed, and implemented. While there are existing enterprise-wide processes, localized business processed are also affected during a major systems overhaul and implementation. Very localize business processes can hamper enterprise-wide systems implementation due to the fact that these processes were not designed with enterprise-wide systems in mind. At some point, companies need to re-design, standardize, or integrate localized processes across the enterprise-wide systems platform.

Planning and Designing an Enterprise Wide Database Systems for E-Business

Socio-Cultural Environment

Technology Solutions

When conglomerates implement enterprise-wide systems, one of the challenges is how to deal with the different sub-cultures characterized by the nature of different departments and subsidiaries. The cultural differences are attributed to the different mind-sets of workers in their particular departments or subsidiaries. For example, a department dominated by engineers can have a different mind-set from workers in the procurement department.

Systems developed for enterprise-wide deployments are not cheap and usually cost corporations millions of dollars. While large conglomerates may have their own internal software solution providers, it is sometimes cheaper or more effective to outsource systems development somewhere else.

Political Dimensions Based on the agency theory (Jensen & Meckling, 1976), an enterprise has different agents (managers, systems users, workers) with certain decision-making power, and may have a different agenda from the owners or stockholders. In the implementation of an enterprise-wide system, we need to ascertain the different goals of agents. 6XFKDJHQGDDOWKRXJKEHQH¿FLDOWRDQLQGLYLGXDO a department, or even a singular business unit, may be detrimental to the aggregate well-being of the entire enterprise or conglomerate. Varying agenda cause political maneuvering. Success or failure of a system can also be due to political reasons (Robey, 1995). We will, therefore, try and identify political factors that cause friction in enterprise-wide systems implementation.

External Processes Enterprise-wide systems are created with the assumption that at some point it will be used to interface with inter-organizational business processes. With the growth of e-business platform and collaboration, corporations need to plan ahead on how such system will be utilized for external collaboration.

Standards Foresight of a new system’s integration into the broader e-business platform means that it is a necessity to adopt current industry-accepted standards for e-commerce transactions or e-business collaboration. This could result in information re-engineering and/or business process re-engineering across a conglomerate.

THE INVENSYS CASE External Factors Partner’s Input Business and outsourcing partners contribute to the development of a system by either providing solutions to improve the system or adding content to the system. Business partners collaborate with each other, and therefore expect to share knowledge and information for a collaborative work.

Assessing the pre-existing situation before the onset of the database project, it was gathered by the consulting team that Invensys was an expanding conglomerate acquiring several subsidiaries at a very rapid pace. Invensys was involved in the business of electronics and industrial manufacturing as well as providing expertise in industrial engineering. Invensys’ purchase of the APV group of companies, a predominantly Scandinavian/British engineering group, and

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Planning and Designing an Enterprise Wide Database Systems for E-Business

Baan ERP systems were some examples of its acquisitions after 1999. Because of several new acquisitions, Invensys found itself with new subsidiaries or strategic business units that had the same engineering needs and information systems requirements, but were not systemically integrated across the Invensys conglomerate. Invensys saw the need to put order into this systemic chaos by implementing a series of enterprise-wide systems that would allow various systems of different subsidiaries to work with each other. The enterprise-wide database system, which is discussed in this section, is a vital component of the broad enterprise systems integration initiative. Invensys needed to start integrating the newly-acquired subsidiaries and realizing synergies that could improve productivity and lower cost.

Preliminary Meeting Invensys’ management team, led by Tim Matt (Vice President of Technology) and Joe Rowlands (Supply Chain Manager), and the consultant group initially discussed a set of criteria on how the proposed online database should be designed. The criteria was the result of consultations with groups involved in the areas of engineering, procurement, and information systems. The database criteria

WKDWZDV¿QDOL]HGZLWK,QYHQV\VKDGWKHIROORZLQJ features and capabilities (Table 1). The criteria was formulated to provide Invensys product design engineers the capability WR ³speed search” for the right components in terms of component quality, cost, and life cycle. When engineers are developing a new product, they search for possible components to use in their design and the appropriate manufacturers to source such components. The database should address engineers’ needs by providing good information to make intelligent decisions about components. Invensys agreed to hire the consulting group DIWHU¿QDOL]LQJWKHLQLWLDOV\VWHPVFULWHULDZLWK them. The consulting group was assigned to: (1) determine the right systems design after studying the Invensys needs and organizational structure;  ¿QGWKHDSSURSULDWHVROXWLRQVSURYLGHUIRUWKH online database system and data content; (3) help implement and evaluate the pilot project; and (4) start implementing the project on an enterprisewide scale. The planning and implementation was divided into several phases.

First Phase of the Project The main objective of this phase was to gather a long list of systems solutions providers and data

Table 1. Systems criteria Systems Features Web Access

Systems Capability Database system should be searchable using the Web

Content Database Content Updating Search Engine Reference system

View Negotiated Price; Life cycle of component; manufacturer’s list Database should have analytical functions &RQWHQWVKRXOGEHPRGL¿DEOHE\,QYHQV\V 6HDUFK(QJLQHVKRXOGKDYHDFHUWDLQGHJUHHRI¿OWHULQJDFFXUDF\ Should allow Invensys to use its product numbering system and link such system with the supplier’s numbering system

Automatic 1RWL¿FDWLRQ Cross Referencing Bill of Materials

It should be able to notify users of any component changes; thus, requiring LWWREHFRQQHFWHGWRDQHPDLOVHUYHUIRUDXWRPDWHGQRWL¿FDWLRQ It should be able to cross-reference several parts related to each other. It should be able to generate a bill of material and include estimate costs for components. It should have the capability to view the cost trend of components.

Cost Projection

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Planning and Designing an Enterprise Wide Database Systems for E-Business

content providers. The consulting group began to study the criteria and then searched for soluWLRQVSURYLGHUV7KH¿UVWFRQFHUQZDVWRORRNIRU a software vendor that could provide the systems IXQFWLRQDOLW\ DQG LQWHUIDFH WKDW ZHUH VSHFL¿HG in the criteria. The second concern was to look for content providers that could actually provide the content for the component database needed for Invensys products (such as climate control systems, sensor systems, metering systems, and home control systems). For electronic components alone, there exist millions of components in the electronics industry that could be sourced from suppliers in the U.S., Europe, and Taiwan. In the process, the consulting group started to initiate contacts with these solutions providers and communicate with them the initial criteria required. The most ideal situation was to look for a total solutions provider, if any existed, that could provide both the online database systems application and database content. While the search process for the systems and content solutions were ongoing, consultants began interviewing the users (Invensys engineers) and gathering PRUHLQIRUPDWLRQWRÀHVKRXWWKHGHWDLOVRIWKH systems criteria; get a feel of user expectations DQG¿QGSRWHQWLDOSUREOHPV The systems provider that the consultants were looking for needed to have expertise in deploying a Web-enabled database system, as well as expertise in creating an intranet system so that they could easily set up the system across the enterprise and EHKLQG D ¿UHZDOO :LWKLQ WKH ¿UVW WZR ZHHNV the consulting group came up with 16 solutions providers that comprised the long list.

Second Phase At this point, Invensys VP Tim Matt asked a Baan representative to join the weekly meetings. It was clear that Baan, Invensys’ own software solutions SURYLGHUZDQWHGWRLQÀXHQFHWKHRXWFRPHRIWKH project. After all, Baan’s expertise was enterprisewide software applications.

The second phase focused on how the consulting team could manage to shorten the long list of possible solutions providers to a short list. More discussions on the requirements were laid out on the table as the consultants, coming from the outside and looking inward (having a different perspective), were concerned that there were more issues to clarify. It was a logical decision for the consulting WHDPWRVWDUWVNHWFKLQJWKHV\VWHPVSURFHVVÀRZ because everyone had a fuzzy understanding of the systems criteria and how such criteria would actually translate to a real system design with long-term viability. After all, the project team had not fully scrutinized the tactical functions of the envisioned system.

Preliminary Steps Before Designing the System (Second Phase Continued) First, to provide coherence across the crossfunctional team involved in shaping the project, the project team decided to name the project as Invensys’ Electronic Component Database (ECD). Fortifying the project’s identity was a great way to market its acceptability within Invensys. Second, the consulting team began to interview engineers who were the target end users for the proposed system. The consultants conducted a comprehensive interview with Engineers Mike Melton and Jim Triplett, and discussed their ideal possible solutions, the functionality they want with the database system, and the technology situation at Invensys (at the time of the interview). Both engineers knew that the database application was going to run off the Internet, so the ¿UVWFRQFHUQWKH\YRLFHGRXWZDV³EDQGZLGWK´ They have had previous experiences with slow bandwidth to the point that Internet connection would be down for a few days. They said that ³ZHRQO\JHWDIDVWFRQQHFWLRQIURPDPWR DP´7KHORFDO,QYHQV\V,7PDQDJHUFRQ¿UPHG that this bandwidth bottleneck existed at the en-

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Planning and Designing an Enterprise Wide Database Systems for E-Business

JLQHHUV¶RI¿FHVLQFHWKH\GLGQRWKDYHDIDVW7 connection. This posed as a dilemma because what good are web applications with a slow bandwidth and a faltering Internet connection? If Invensys outsourced this system to a solutions provider and the server was running remotely, the consulting team noted that a shortterm solution to circumvent the lack of bandwidth and intermittent disruption of Internet connection was to have a mirror database server inside Invensys’ Intranet system which would automatically download some of the preferred database content periodically, preferably during early morning time when bandwidth was least problematic. In such case, even if the Internet connection went off-line, the engineers would still be able to access their preferred database content from a local area network. This was taken into consideration in designing the system. The engineers also complained that it took them hours to sift through component databases in RUGHUWR¿QGWKHVSHFL¿FFRPSRQHQWVWKH\QHHGHG 7KHUHZHUHVHYHUDOUHDVRQVIRUWKLV²GLI¿FXOWDQG inaccurate database search engines; huge volume of components/parts (millions of components); poor content quality (inadequate information on several components); lack of content standards; and confusing reference numbers. On top of these, Invensys was using different component/part reference numbers that added confusion on how FRPSRQHQWVZHUHFODVVL¿HG In terms of content quality and standards, the engineers clearly conveyed that they preferred to DFFHVVFRPSRQHQWSDUWVVSHFL¿FDWLRQVYLD3') format and, if possible, via a universal CAD formats so that they can immediately view the component schematics in their CAD software SDFNDJHDQGVHHLIWKHFRPSRQHQW¿WVZLWKWKH rest of their design schematics. They wanted to have the most complete technical information available in order for them to make a better decision on which components to use. After identifying these problems, the consultLQJWHDPDQGHQJLQHHUVDJUHHGRQ³NH\SRLQWV´

408

to approach the systems design and the database content. Key points were: (1) effectiveness of search engine; (2) a uniform parts numbering V\VWHP D¿OWHULQJSURFHVVIRU³SUHIHUUHGFRQWHQW´RUFRQWHQWWKDWFDQEHDFFHVVHGRIÀLQH   standard data access format and viewing; and (5) data manipulation capabilities (or the capability to download and manipulate CAD data).

Content Management: Establishing Database Standards for Enterprise-Wide Usage Before proceeding to design the system, the consultants considered a more important issue that PXVWEHUHVROYHG¿UVW²³content standards”. No matter how good the system is, the way content is represented and managed is key to the long term viability of this project. So, the team agreed to reengineer the information process and management (or how component information was managed within Invensys) by adopting the following: 1.

Create a uniform Invensys parts numbering system: One of the current problems within Invensys is the use of multiple numbering schemes for a single component part. Adding to this confusing numbering schemes is component suppliers also having different numbers for the very same components. Engineers agreed that it would be nice to have one uniform component number to which they can refer to; otherwise, it will be very confusing to have one Invensys subsidiary refer to an electronic transistor as Product No. 29323, while another subsidiary referring to exactly the same transistor as Product No. AC34553. This new uniform parts number scheme needs to be created and linked to all other legacy numbers (the old part numbers) and suppliers’ part numbers. Tim Matt acknowledged that this would be very helpful considering that different Invensys subsidiaries in Germany alone use

Planning and Designing an Enterprise Wide Database Systems for E-Business

2.

3.

several parts numbering systems. Invensys subsidiaries in the UK and the U.S. also use different numbering systems. In order for Invensys to have one enterprise-wide electronic component database, it was best to adopt only one uniform parts numbering system. Create a standardized component parts catalog structure: There are hundreds of millions of electronic and mechanical components being used in various industries today. Electronic component parts include integrated circuits, transistors, and circuit boards, among others. Cataloging millions of components is not an easy task, nor is it simple to search through such an enormous number of items. To help businesses create HI¿FLHQF\LQWKLVWDVNWKH8QLWHG1DWLRQV created a standard for cataloging component parts—the UNSPSC (United Nations Standard Products and Services Code). UNSPSC (see www.UNSPSC.org; 2006) is a hierarchical coding system being used to classify goods/services into categories and sub-categories. Invensys design engineers face the same task as other engineers in the industry searching through volumes of component information. There was a need to create a uniform catalog structure for navigating through the suppliers’ component catalogs in the ECD system. The UNSPSC was unanimously agreed upon as the preferred cataloging standard. Other standards set by the Rosettanet.org, such as DUNS and eClass, were also considered to allow easier LGHQWL¿FDWLRQRIVXSSOLHUVDQGSURGXFWV (VWDEOLVKD¿OWHULQJSURFHVVIRUSUHIHUUHG data content: Each Invensys site has a different set of data content needs. The project team anticipated that each site would prefer DPRUHORFDOL]HGGDWDVHWRU³SUHIHUUHGGDWD content”). If the end users could anticipate what the data content they would be accessing most, such content could be uploaded to

4.

5.

a local server within their local area network. The other reason for having a preferred content is to save engineers search time. The search engine will be faster if the localized database only contains the preferred content. So even if the Internet connection is off-line, engineers can still access the content they need. The team decided that there has to be D¿OWHULQJSURFHVVWRLGHQWLI\WKHSUHIHUUHG content. Standardize data access format: Invensys engineers have expressed the need to standardize the data access format. Adobe PDF was the preferred format for viewing comSRQHQW WHFKQLFDO VSHFL¿FDWLRQV +RZHYHU they have also stated that if the component data could be accessed as CAD schematics, that would greatly help them. Data manipulation capabilities: If a content provider could include two-dimensional or 3D schematics of components/parts (using &$' ¿OH IRUPDWV  WKHQ HQJLQHHUV FRXOG easily try to test such component schePDWLFV ¿UVW E\ VHHLQJ LI VXFK FRPSRQHQW LQGHHG³¿WV´ZLWKWKHLUQHZSURGXFWGHVLJQ schematics. This would considerably lessen potential design errors. The capability of a GDWDEDVHWRSURYLGH&$'GDWD¿OHVPHDQV that it is providing engineers data editing or manipulating capabilities—a high quality content.

Figure 2 shows the process of standardizing data content. First, a uniform Invensys parts numbering system (UIPN) is created for all components that Invensys use for its products. Second, the UIPN is then mapped to the different legacy (old) numbering systems being used by the different Invensys subsidiaries (in Germany, UK, and the U.S.) that reside in their respective local database or PDM systems. Third, the various numbering systems that different suppliers use will also be mapped to the UIPN. This will come from either a content provider or from suppliers. With the ex-

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Planning and Designing an Enterprise Wide Database Systems for E-Business

Figure 2. Content standardization for EIS development in Invensys LOCAL DATABASE SYSTEMS (DIFFERENT INV SITES)

LOCAL PDM SYSTEMS (DIFFERENT INV SITES)

Different Legacy Part Numbers (Internal to Invensys)

INV Germany Parts No. INV Rockwell Parts No. INV Richmond Parts No. INV UK Parts No.

STANDARDIZED PARTS CATALOG STRUCTURE FILTERING PROCESS FOR PREFERRED DATA CONTENT

Search

CREATING A UNIFORM INVENSYS PARTS NUMBERING SYSTEM

Different Supplier Part Number (External to Invensys)

DATA CONTENT PROVIDER

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Supplier 3 - Part No. 3

SUPPLIER DATABASE CATALOG

Uniform Invensys Parts Number (UIPN) ECD GLOBAL SYSTEM (FILTERS)

PRIMARY DATA

STANDARDIZED DATA ACCESS FORMATS AND VIEWING CAPABILITIES

Catalog Navigation (UNSPSC) Supplier Search (DUNS) Product Datasheet (PDF, HTML) Bill of Materials (Excel, HTML)

SECONDARY DATA

STANDARDIZED TECHNICAL DATA MANIPULATION CAPABILITIES

Object-Oriented Model Data (STEP) CAD Data (Autocad, Solidworks, Mentor) PDM Data (Baan, Ingenuuf)

istence of an enterprise-wide numbering system, Invensys will be able to create its own standard catalog structure that will greatly diminish any miscommunication between Invensys subsidiaries regarding which parts they are using and which parts they have in their inventories. The UIPN will also allow subsidiaries to use only a single QXPEHUZKHQ¿OWHULQJWKHFRQWHQWWKH\QHHGIRU their preferred database content; thus simplifying the FRQWHQW¿OWHULQJSURFHVV The standard specs that Invensys engineers expected from the initial standardization of

410

* INV = Invensys

content was included in what we referred to as ³SULPDU\GDWD´)RUFDWDORJQDYLJDWLRQ81636& was the standard agreed upon. To authenticate supplier identity correctly (international or local) during the online search process, the use of Rosettanet.org standard DUNS was also agreed upon. To access product component technical specs (product datasheet), PDF was the preferred format, but viewing it in HTML was acceptable. For viewing bill of materials, Excel spreadsheet DQG+70/ZHUHDFFHSWDEOH¿OHVWDQGDUGV7KH engineers hoped that they could also standard-

Planning and Designing an Enterprise Wide Database Systems for E-Business

ize component schematics data. We refer to this as secondary data because we anticipated that FRQWHQWSURYLGHUVZLOOKDYHGLI¿FXOW\REWDLQLQJ WKLVW\SHRIGDWD¿OH7KH,62VWDQGDUG³67(3´ (Weidemann, 1996) was chosen for 3D objectRULHQWHGPRGHOLQJZKLOHSURSULHWDU\VRIWZDUH¿OH standards that Invensys was already using based on off-the-shelf CAD and PDM software (such as AutoCAD, Solidworks, Baan, and Ingenuuf) were incorporated as secondary data. The consulting group was responsible for introducing the ISO STEP standard as it was widely used across several industries; while the ,QYHQV\V HQG XVHUV LQÀXHQFHG WKH DGRSWLRQ RI proprietary standards that they were already using. Invensys had invested a lot into these CAD DQG3'0VRIWZDUHWKDWLWZDVORJLFDOWRUHWUR¿W the database formats with these software. During the discussion for content standardization, Terry Wilson, a top engineer from the ,QYHQV\V 5RFNZHOO RI¿FH LQ ,OOLQRLV VRPHZKDW objected to the UIPN. His reason was that they KDGEHHQXVLQJDQXPEHULQJV\VWHPHI¿FLHQWO\,W took the project team about 4-5 days to make him change his perception that while his local component numbering system worked for his group, it would not help the entire enterprise. He came back later and said that he had developed a narrow tunnel view of this issue as he never quite saw the big picture. Creating a uniform number system would actually save Invensys a lot of money if they knew that one subsidiary had an oversupply of a particular component, while another subsidiary actually needed such component. It would be easy to transfer the excess inventory of such component between subsidiaries, and the subsidiary in need of such component does not have to place a new procurement order for an overstock component. If there were two different numbering systems used separately by these two subsidiaries, they would never know that the other subsidiary had those components in stock because the database would only register two differently numbered components.

The importance of interoperable content standards and management has been strengthened by the creation of the iECM (interoperable enterprise content management) Consortium (Preimesberger, 2006). The tremendous need for interoperable content in enterprise content management in the last few years has encouraged industries to create such consortium hoping that data content can be seamlessly exchanged and accessed between different types of enterprisewide systems. This recent development highlights the initiative behind the Invensys project, in its effort to managing content across an international enterprise setting.

Systems Design This section describes the steps and processes of designing the system from the system feature to ¿QGLQJWKHDSSURSULDWHVRIWZDUHKDUGZDUHDQG V\VWHPVSURFHVVÀRZ

Deciding on the Systems Feature After the consulting team interviewed key end users, the group agreed on how to standardize content for the ECD, and proceeded to delineate the functions of the system as follows: 1.

2.

3.

Intelligent search engine: The ability to do accurate multiple Boolean search based on the attributes of the components rather than DVLQJOH¿HOGVHDUFKHQWU\LVLPSRUWDQWLQ ¿QGLQJFRPSRQHQWVDFFXUDWHO\$83636& catalog structure should help in the progression of the search process. $XWRPDWLFQRWL¿FDWLRQ Users want to be QRWL¿HGRIFKDQJHVUHJDUGLQJFRPSRQHQWV that are important to them. This needs perVRQDOL]HG¿OWHULQJDQGFXVWRPL]DWLRQVRWKDW RQO\UHOHYDQWXVHUVSHFL¿HG LQIRUPDWLRQLV pushed back to the end users. 3UHIHUUHG FRQWHQW ¿OWHULQJ PDQXDO  It was decided that some of the data content

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Planning and Designing an Enterprise Wide Database Systems for E-Business

4.

5.

¿OWHULQJKDVWREHGRQHPDQXDOO\7KLVLQYROYHVKLULQJD³FRQWHQWPDVWHU´RU³FRQWHQW manager”. The Rockwell group (the group targeted for the pilot site of the database) expressed that they wanted to focus only on three types of component parts—integrated circuits, capacitors, and transistors. Established vs. upcoming components (partial automation of preferred content ¿OWHULQJ When components are frequently used by an Invensys subsidiary, such comSRQHQW ZLOO EH EUDQGHG DV ³HVWDEOLVKHG components”, and the content provider could automatically push any information updates on these components to the Invensys ECD. +RZHYHU WKHUH DUH DOVR QHZ ³XSFRPLQJ components” that Invensys engineers may want to search for. If these components are not in the database, they could request for new information about these components using their local content server to electroniFDOO\¿OHVXFKUHTXHVW Dynamic data: The Rockwell group exSUHVVHGWKHLUQHHGIRUDPRUH³dynamic data content”, which meant that they wanted to see the technical specs updated as frequently and accurately as possible. However, they would rather have the data content updated and maintained by a content provider rather than ask the manufacturers for a new catalog all the time.

2.

3.

Hardware, Software Application, and Information Flow )LJXUH  VKRZV KRZ WKH V\VWHP DQG GDWD ÀRZ was designed by the consulting team. It has the following features: 1.

412

The database application provides users the capability to personalize the database interface: The users readily said yes when asked if interface customization was something they would like to have. Customizing

4.

the interface allows users to access information they frequently use more quickly. A lot of productivity time is wasted if data DFFHVVLQJWDVNVDUHQRWHI¿FLHQW Two central database servers will be used: (1) a universal database server—a database server that is maintained by an independent content provider (outsourced) containing different suppliers’ catalogs, located outside of Invensys’ Intranet, and has all the component data; and (2) Invensys ECD—a centralized Invensys database server which partially mirrors the universal database but LVDOUHDG\¿OWHUHGIRU,QYHQV\VSUHIHUUHGGDWD content needs. The ECD is inside Invensys’ LQWUDQHWV\VWHPDQGSURWHFWHGE\D¿UHZDOO The Invensys ECD server runs the database application including the interface, search HQJLQHDQGRWKHUXVHUGH¿QHGIXQFWLRQV$ Web Master and a DBA (Database Administrator) need to be hired to run the Invensys ECD. Local content management servers: Ideally, each Invensys subsidiary will have its on content management server that handles the unique database content (the localized database) that a local subsidiary needs. Each Invensys subsidiary group should have its own content master to determine the content LWUHTXLUHV,IWKHXVHUFDQQRW¿QGWKHGDWD content he/she is looking for in the central Invensys ECD, then he/she can use their local content management server to pull data from the universal database server and transfer such data to the central Invensys ECD. New GDWDVKRXOG¿UVWEHPLUURUHGLQWKHFHQWUDO ECD system before they are again mirrored in the local content server. In that way, all local contents will have a back-up copy in the central ECD server. Flow of new data: In case a supplier/ PDQXIDFWXUHURIFRPSRQHQWVKDVD³QHZ´ component, this new information is usually pushed to a content provider who keeps

Planning and Designing an Enterprise Wide Database Systems for E-Business

)LJXUH'DWDDQGV\VWHPVÀRZGLDJUDP INV User

INV User

INV User

INV User

INV User

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Internal Invensys Content Management Content Management Servers

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Automatic Notification (Email Server or Personalized Interface)

Personalized Interface for Individual Productivity

Invensys Preferred Content (filtered) Invensys ECD Server

Dynamic vs. Static Data Established vs. Upcoming Components

PULL PREFERRED DATA SET (Requested)

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PUSH PRE-SELECTED DATA SET (Automated)

Content Provider Universal Database Server Request Product Information (Pulled from Manufacturer)

*INV = Invensys

New Product Information (Pushed by Manufacturer)

COMPONENT SUPPLIERS OR MANUFACTURERS OF COMPONENTS (SOURCE OF DATA)

D GDWDEDVH ¿OH RI DOO SURGXFW FDWDORJV ,Q instances where the component data is not found in the universal database server of the content provider, then the content provider’s system should pull such data directly from the supplier’s system. Figure 3 shows how the system pulls and pushes data into the system.

Choice of Systems and Content Providers (Narrowing the List) After the project team agreed with how content should be standardized and how the system is to be designed, the team started interviewing potential systems providers, content providers, or total solutions providers (providing both the system and content solutions). The list (Table

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Planning and Designing an Enterprise Wide Database Systems for E-Business

Table 2. The short list Vendor Requisite Technology (Systems provider with some data content)

I2 Technologies (Total solutions provider)

IHS (systems provider) & Partminer (content provider)

Strengths - Impressive off-the-shelf solution - Effective component search engine - Software package had built-in data catalog structure mapping standards (e.g. UNSPCS)  6RIWZDUHFRXOGSURYLGH'RU'&$'¿OH formats (no other vendors had this function) - Their system could interface with Oracle, Baan, SAP, and other enterprise software - Total solutions provider (provided both systems and data content) - 5 million components in their database - Top notch advance supply chain planning V\VWHPFRPSRQHQWVHDUFKLGHQWL¿FDWLRQ sourcing, and procurement) -Big on content factory – a content quality control process - IHS and Partminer are partner subsidiaries - IHS has a good history in cataloging and structuring huge electronic component database for the US military - Partminer has the largest database content among all content providers

2) was narrowed down to three providers that could meet the demands and criteria of the ECD project.

CASE ANALYSIS: THE INFLUENCE OF SOCIO-TECHNICAL FACTORS IN VENDOR CHOICE The analyses next focus on how the three solutions providers on the short list show potential compatibilities or non-compatibilities with the socio-technical environment of Invensys. The providers were assessed and selected depending RQKRZWKH\ZHUHSHUFHLYHGWR¿WLQWRWKHVRFLR technical fabric of the Invensys organization. See Table 3. ,QYHQV\V ¿QDOO\ FKRVH 5HTXLVLWH WR EH LWV systems provider for the ECD project. However, ,QYHQV\VZDVQRWVDWLV¿HGZLWK5HTXLVLWH¶VVSDUVH supplier’s catalog content and supplier network. So, Invensys asked Partminer to be its content provider.

414

Weaknesses - Only about 140 suppliers provided their content, which was sparse compared to other content providers - New company and have not serviced large corporations before - Expensive, considering their position as market leader in advance supply chain planning software - A direct competitor to Baan

- IHS has no ready to use offthe-shelf solution and has to customize the system - Partminer’s data quality suffers

CONCLUSION ,Q UHWURVSHFW DVVHVVLQJ WKH VRFLRWHFKQLFDO ¿W between the three providers on the short list showed that it was really a toss up between Requisite and I2. IHS was not prepared to show a demo of any software and this was immediately seen as a negative point for them. Invensys had to separate its assessment of Partminer from its partner subsidiary, IHS. I2 was particularly very strong on all four external socio-technical factors: (1) providing solutions that meet industry standards; (2) integrating external business processes (supply chain); (3) providing new innovative technologies for supply chain planning, e-sourcing and e-procurement; and (4) networking with supplier partners for collaboration. On the other hand, Requisite was particularly weak with the external factors. It did not have the same experience as I2 had on providing a good solid link with suppliers for external processes (supply chain). Requisite did not also have enough supplier catalog contents

Planning and Designing an Enterprise Wide Database Systems for E-Business

Table 3. Vendor

$VVHVVLQJWKH6RFLR7HFKQLFDO,QÀXHQFHV

Requisite Technologies

Political – Requisite was not considered a political threat to Invensys’ subsidiary Baan. It did overlap with Baan’s supply chain planning systems (iBaan SCS and iBaan Collaboration), but Baan was not really worried about that. Baan representatives were supportive of Requisite. Cultural - Since Requisite’s software was made for engineers, its appeal was readily accepted by the engineering team’s sub-culture. The software used the engineer’s ‘lingo’ and understood their needs. Its ability to display components in a three-dimensional CAD format and provide technical specs in PDF immediately won the engineers’ support. Requisite made an impressive demo of their software that pleased the engineers. Internal Enterprise Processes - Requisite made it clear that their software was easily compatible with Invensys’ existing enterprise systems and processes (used for engineering and procurement processes). Internal Technology Infrastructure – Requisite was very open to setting up their system to work with the existing technologies of Invensys and even making sure that it will be compatible from the web application to the back-end application interface. Invensys software was compatible with Baan, Oracle, SAP, Ariba and other software being used in enterprise wide systems. End-User Requirement – The interface of the off-the-shelf package was very user friendly based on the software demo. There were twelve different ways to search for components. The users could customize the software interface to their preference and the content they preferred to see. Requisite’s content requirement for component suppliers was also based on Adobe’s PDF format, which was part of the criteria laid out by Invensys, so such criteria were met. Industry Standards – Requisite created their software with the industry standards in mind. They were XVLQJ WKH 8163&6 FDWDORJLQJ VWDQGDUGV DQG ZHUH DOVR ¿OLQJ GDWD VWDQGDUGV VXFK DV 3') DQG &$' They also brought in standards that were set by Industry consortium such as Rosettanet.org. Invensys was impressed with Requisite’s long term vision to incorporate several standards into Invensys’ own software. External Business Process – Requisite’s system for content management was based on the formation of a supplier’s hub. The electronic hub aggregates the suppliers’ catalogs contents into Requisite’s main database repository. The push for a better content quality and reliable data format was a strong focus of Requisite system’s ability to make sure that the external procurement and component selection process would be handled smoothly across the supply chain. External Technology – The integration between Requisite’s search engine, engineering data standards and requirements, and its ongoing aggregation of supply chain data from different suppliers was a strong feature that met the Invensys criteria for being able to merge contents from different supplier’s system (external systems) with Invensys’ own internal enterprise information system. Partner’s Contribution – Requisite was very open to working with Invensys’ major suppliers as well as other suppliers that provide data catalogs of product components that are useful to Invensys.

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Table 3. continued I2 Technologies

Political - I2 was considered a high threat to Baan, since they were offering similar software packages for enterprise systems integration and supply chain management. It was very obvious that the Baan members of the team, assessing the vendors, did not feel comfortable with a large player like I2. Cultural±WKH,JURXSZDVDEOHWRSURMHFWWKDWWKH\ZHUHYHU\ÀH[LEOHLQGHDOLQJZLWKGLIIHUHQWVXE cultures of a large enterprise. They wanted to meet the needs of top IT managers, the local engineers, the procurement and sourcing group, and other players involve in a supply chain management. Their ability WRUHODWHWRWKHQHHGVRIDJHQWVVWDNHKROGHUVLQGLIIHUHQWKLHUDUFKLHVRIDODUJHHQWHUSULVHUHÀHFWHGWKDW, was a seasoned player in providing supply chains systems solutions. Internal Enterprise Process ± , SUHVHQWHG WKDW WKH\ KDG WXUQNH\ VROXWLRQV WKDW FRXOG HDVLO\ ¿W LQWR the global supply chain process of Invensys. There was not really much resistance to such claim when I2 presented their systems solutions before the Invensys team, because I2 knew what they were talking about and their reputation preceded them. They have shown that other larger enterprises, like Dell, use their system successfully. Internal Technology – I2 was willing to provide the proper infrastructure to run their system within Invensys and see to it that their systems are compatible with that of Invensys. This was not seen as a problem from the project’s standpoint. However, Baan was not too keen on the potential scenario that they may need to interface their own enterprise systems with that of I2. It also appeared that the more ,QHHGHGWRFXVWRPL]HLWVH[LVWLQJVRIWZDUHVROXWLRQVDQGGDWDEDVHFRQWHQWWR¿WWKHLQWHUQDO,QYHQV\V environment and existing technologies, the more expensive it will be. End-User Requirement,GLGQRWSURYLGHYHU\GHWDLOHGLQIRUPDWLRQRQKRZWKHLUVRIWZDUHEHQH¿WV VSHFL¿FHQGXVHUIXQFWLRQV+RZHYHUWKH\FODLPHGEDVHGRQWKHLUWUDFNUHFRUGWKDWWKHLUVRIWZDUHDQG VROXWLRQVFDQEHYHU\ÀH[LEOHDQGZLOOPHHWDOORIWKHFULWHULDVHWIRUWKE\,QYHQV\VIRUWKH(&'SURMHFW Industry Standards – I2 has established industry supply chain solutions for consumer electronics, semiconductor industry, original equipment manufacturers, and other high-tech industries. It was obvious that their solution incorporates many of the industry standards that Invenys needed. There was no question about their capability in this respect. External Business Process – Like SAP, I2 has focused on vertical industry integration. One of the ¿UVWLQGXVWULHVWKDW,IRFXVHGRQZDVWKHHOHFWURQLFVDQGVHPLFRQGXFWRULQGXVWU\ZKLFK,QYHQV\VZDV part of. I2, not only had the experience, but also the expertise to link external supply chain process of electronic and semi-conductor component suppliers with that of Invensys internal processes. I2 was the ideal candidate in this respect. External Technology- I2 already had established its advance supply chain planning system in accordance with industry standards in the electronics and semiconductor industries. Invensys would stand to gain from I2’s technology infrastructure in facilitating e-Sourcing and e-Procurement processes within such industries. Partner’s Contribution – I2 had a huge content of component catalogs due to its partnership with thousands of suppliers. I2’s acquisition of Aspect Development Inc. (a large data content provider) proved that I2 was serious about leadership in the supply chain content management area. Requisite had only140 suppliers during the assessment period and their supplier’s catalog content volume could not match I2’s.

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Planning and Designing an Enterprise Wide Database Systems for E-Business

Table 3. continued IHS/ Partminer

Political - Since IHS systems worked mostly with the military and government institutions, they focused on a different clientele. Baan did not feel politically threatened by their presence. Cultural - IHS did not appeal to the engineers and the team. This was because IHS did not have an offthe-shelf solution which could be evaluated or demoed. The engineering team did not like the uncertainty of trusting a vendor with nothing to show but reputation. The team included this vendor on the short list because Invensys wanted to consider a systems provider that could customize a system from scratch and cater to the unique needs of Invensys if no off-the-shelf application is compatible with Invensys needs. But it seemed that the corporate culture of Invensys did not like the idea of uncertainty and demanded that a provider already had a ready solution. Internal Enterprise Process – There was no indication of how IHS solutions can be integrated properly with Invensys. Internal Technology - No particulars were offered. IHS just simply stated that they can customize VRIWZDUHWR¿WZLWK,QYHQV\VLQWHUQDOWHFKQRORJLHV End-User Requirement±7KH\VDLGWKH\FDQFXVWRPL]HVRIWZDUHWR¿WHQGXVHU¶VQHHGVEXWQRGHWDLOV were offered. Industry Standards – Although Partminer’s data content quantity was impressive, a substantive portion of the data did not meet the quality needed for e-Commerce or e-Procurement purposes. Several RI 3DUWPLQHU¶V GDWD ZHUH ROG HOHFWULF FRPSRQHQWV DQG WKHLU VSHFL¿FDWLRQV DQG GDWD IRUPDWWLQJ QHHGHG updating. Several of Partminer’s data still need to be converted to a PDF format. External Business Process – IHS did not seem to have an existing systems infrastructure to link Invensys internal process to external supply chain processes of different suppliers. External Technology was not explained in their presentations. Partner’s Contribution – Partminer had the largest database/ content among the solutions provider in the short list. They had over 10 million components listed as the result of their extensive contacts with so many electronics and semi-conductor suppliers on an international scale. Their ability to gather contents from a magnitude of suppliers impressed Invensys.

and supplier contacts as I2 had on both electronics and semi-conductor industries. Requisite appeared to be strong in addressing the internal factors—politically they were not a threat; they provided a detailed demo that greatly appealed to the engineering group; their software ZDVFOHDUO\ÀH[LEOHWRHQGXVHUQHHGVDQGWKHLU software package was open to connection with Invensys’ existing technology infrastructure. Table 4 shows the impression of the team when they evaluated the providers. %RWK,DQG5HTXLVLWH¿WLQYHU\ZHOOLQWRWKH socio-technical environment of Invensys. However, the political factor was the strongest factor in deciding which one to choose. The threat that

I2 had over Baan was the major factor that tipped the advantage towards adopting Requisite. To remedy Requisite’s weakness (its weak content and low external ties to suppliers), Invensys asked Partminer to be its content provider. As seen in Table 4, Partminer balanced out the weakness of Requisite by providing the content for the ECD system. And since Partminer was not a solutions or systems provider, it was not a threat at all to Baan. Invensys believed that the synergy between Partminer’s strong content base and Requisite system’s ability to update Partminer’s content quality was key to the solution. 7KH SROLWLFDO ¿W ZDV WKH VWURQJHVW IDFWRU LQ choosing the systems provider, while the volume

417

Planning and Designing an Enterprise Wide Database Systems for E-Business

RIGDWDUHÀHFWHGWKHDELOLW\RIWKHFRQWHQWSURYLGHU to provide links to external suppliers. Because Partminer made up for the weakness of Requisite, Invensys preferred to deal with two separate providers than risk political tension in dealing with only one total solutions provider (I2). In retrospect, the most critical factors inWHUQDOO\ ZHUH WKH SROLWLFDO ¿W DQG WKH HQGXVHU requirements. The team made sure that the end users would love to use the system when it was deployed for adoption. The ability to provide external supplier partnership and collaboration was also very critical. Invensys’ goal was to save money on e-sourcing and e-procurement, and it was understandable why reaching as many suppliers as possible was a key element in choosing Partminer, who had extensive connection with suppliers and had the database to aggregate thousands of supplier catalogs. Industries are moving towards integrated supply chain using the e-business platform, so it was not hard to understand why the collaboration factor across the supply chain was a critical external component.

The limitation of this chapter is that it covered only the planning and development stage of an enterprise-wide application which took place within a four-month period. Full implementation of this system across the entire Invensys conglomerate will take at least three years to complete and this includes implementation at the global level. Three months after the pilot project was adopted in Invensys’ Illinois site, the implementation team was already starting to create a French version of the online software application, and preparing a package training program for Invensys’ engineers in France. It is only a matter of time when Invensys will be preparing for the systems diffusion DQGDGRSWLRQLQLWVRI¿FHVLQ*HUPDQ\DQG,WDO\ The long-term implementation phase will be an interesting subject for another future study. But in spite of the fact that the long-term success of the project will still depend on several factors and events, we believe that Invensys has set a good foundation for this project’s long-term success. The move toward industry-standard data content and integrating Invensys’ system with an external

7DEOH6RFLRWHFKQLFDOLQÀXHQFHIURPYHQGRUDVVHVVPHQW

418

SOCIO-TECHNICAL FACTORS

Requisite

I2

HIS

Political Fit Address the Cultural Diversity Compatibility with Internal Enterprise Process Internal Technologies (Compatibility) End-User Requirement Industry Standards External Business Process External Technologies

Very Strong Strong

Weakest Strong

Moderate Weak

Partminer (Content) Very Strong NA

Strong

Strong

Weak

NA

Strong

Strong

Weak

NA

Very Strong

Moderate

Moderate

Strong

Strong

Strong

Moderate

Moderate

Moderate

Very Strong

Weak

Strong

Moderate

Very Strong

Weak

Partnership (Providing Solutions and Infrastructure for Collaboration)

Weakest

Very Strong

Very Strong (data content management) Very Strong (providing content for collaboration)

Planning and Designing an Enterprise Wide Database Systems for E-Business

suppliers’ hub for e-sourcing and e-procurement clearly indicated that Invensys provided the appropriate environment for their enterprise system to grow and adapt with ongoing changes in the external e-business environment.

I2 Technologies. (2006). Retrieved 2002-2006, from http://www.i2.com/

REFERENCES

Kim, Y., Lee, Z., & Gosain, S. (2005). Impediments to successful ERP implementation process. Business Process Management Journal, 11(2), 158-170.

Baldo, S. (2001). Interview transcripts. Partminer. Baskerville, R. (1997). Distinguishing action research from participative case studies. Journal of Systems and Information Technology, 1(1), 25-45. Baskerville, R. (1999). Investigating information systems with action research.Communications of the Association of Information Systems, 2(19), 1-30. Bijker, W., Hughes, T., & Pinch, T. (1987). The social construction of technological systems. Boston: MIT Press. Burk, D. (2001). Interview Transcripts. Partminer. Cale, E. G. (1994). Quality issues for end-users developed software. Journal of Management Information Systems, 45(1), 36. Duns Numbering Standard. (2006). Retrieved 2002-2006, from http://www.dnb.com/us/ Gosain, S. (2004). Enterprise information systems as objects and carriers of institutional forces: The new iron cage. Journal of the Association for Information Systems, 5(4), 151-182. Hammer, M., & Champy, J. (1993). Reengineering the corporation. New York: Harper Business. +XOW0 /HQQXQJ6 7RZDUGVDGH¿QLtion of action research: A note and bibliography. Journal of Management Studies, (17), 241-250. Interoperable ECM. (2006). Retrieved 2006, from http://www.aiim.org/standards.asp?ID=29284

Jensen, M. C., & Meckling, W. H. (1976, OctoEHU 7KHRU\RIWKH¿UP0DQDJHULDOEHKDYLRXU agency cost and ownership structure. Journal of Financial Economy, 3, 305-360.

Matt, T. (2001-2002). Dialogues with Tim Matt. Invensys, Richmond Group. Melton, M. (2001). Interview transcripts. Invensys, Richmond Group. Miller-Herholtz, B. (2001). Interview transcripts. HSI Engineering. Partminer. (2006). Retrieved 2002-2006, from http://www.partminer.com/

Preimesberger, C. (2006). New content-management standards group begins operation. Retrieved 2006, from http://www.eweek.com/ article2/0,1759,1963098,00.asp?kc=EWNKT020 9KTX1K0100440 Requisite Technologies. (2006). Retrieved 20022006, from http://www.requisite.com Robey, D. (1995). Theories that explain contradiction: Accounting for the contradictory organizational consequences of information technology. In J. I. De Gross, G. Ariav, C. Beath, R. Hoyer, & C. Kemerer (Eds.), Proceedings of the Sixteenth International Conference on Information Systems, Amsterdam, December (pp. 59-60). Atlanta, GA: ICIS Organization. Rosettanet.org. (2006). Retrieved 2002-2006, from http://www.rosettanet.org Rowlands, J. (2001-2002). Dialogues with Joe Rowlands. Invensys, Richmond Group. 6RK& .LHQ6 &XOWXUDO¿WVDQGPLV¿WV Is ERP a universal solution? Communications of the ACM, 43(4), 47-51.

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Slavich, F. (2001). Interview transcripts. Technology Consultant, Requisite Technologies.

Wilcox, M. (2001). Interview transcripts. Regional Sales Manager, Requisite Technologies.

United Nations Standard Products and Services Code. (2006). Retrieved 2002-2006, from http:// www.UNSPSC.org

Wilson, T. (2001). Interview Transcripts. Invensys, Illinois Group.

Wales, J. (2001). Interview transcripts. Engineer, HSI Engineering. Weidemann, C. (1996, November). Testing of STEP AP 203 processors. ProduktModeller Conference Proceedings, Linkoping, Sweden (pp. 371-386). Linkoping, Sweden: Linkoping University.

Wood-Harper, T. (1985). Research methods in information systems: Using action research. In E. Mumford et al. (Eds.), Research methods in information systems (pp. 169-191). Amsterdam: North-Holland.

This work was previously published in Modelling and Analysis of Enterprise Information Systems, edited by A. Gunasekaran, pp. 224-248, copyright 2007 by IGI Publishing (an imprint of IGI Global).

420

421

Chapter 2.7

SMEs ECT Reality: From Ad-Hoc Implementation to Strategic Planning Zakia A. Elsammani Manchester Metropolitan University, UK

ABSTRACT

INTRODUCTION

Lack of strategic planning in e-commerce and subsequently e-business adoption within smallto medium-sized enterprises (SMEs) has been strongly reported in literature. This chapter presents SMEs’ Web presence implementation patterns and unravels the reasons behind the lack of strategic planning when adopting Electronic Commerce Technologies (ECT). The chapter SUHVHQWV¿QGLQJVIURPVHPLVWUXFWXUHGLQWHUYLHZV from 11 SMEs in the Northwest of the UK. FindLQJV UHÀHFW WKH GLIIHUHQFH LQ GHYHORSPHQW DQG management practices of Web presence, between WKHPRUHDEOH1HHG3XOO60(VWKDWLGHQWL¿HGWKH need to adopt ECT, and the less able Technology 3XVK60(VWKDWZHUHPRVWO\LQÀXHQFHGE\change agent diffusion and awareness efforts. Over time, HDFKJURXSRI60(VUHÀHFWDGLIIHUHQWSDWWHUQLQ ECT implementation. This chapter depicts the issues that hinder SMEs, particularly in micro and small, in moving beyond Web site adoption.

Research has strongly stressed the importance of adopting Electronic Commerce Technologies (ECT) as a driving force for competition and the importance of strategic planning to achieve competitive edge. The majority of SMEs now do own a Web presence (DTI, 2003). However, SME Web sites are strongly criticised for their simplicity and lack of business objectives and planning. Recent research shows that despite the hype on e-commerce and the technology facilitating improved business practice, a number of SMEs have not capitalised on this new mode of conducting business (Fillis, Johansson, & Wagner, 2004). Although there might be numerous success stories of e-commerce adoption where SMEs were able to use e-commerce to increase WKHLUSUR¿WDELOLW\WKHDPRXQWRIIDLOXUHKDVEHHQ extremely high (Olson & Boyer, 2003). SMEs that developed e-commerce capability have not done VRVWUDWHJLFDOO\DQGKDYH\HWWRHQMR\VLJQL¿FDQW

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

SMEs ECT Reality

cost and time savings (Quayle, 2002). In the United Kingdom, the Department of Trade and Industry (DTI) benchmarking report indicates that micro and small businesses are questioning the value of WKHLU:HESUHVHQFHDQGDUH³FOLFNLQJRII´'7, 2003). Among the reasons for adoption failure LV WKH LQÀXHQFH RI :HE VLWH HIIHFWLYHQHVV DQG development on individual users’ acceptance of new technology and SME Web presence (Olsen & Boyer, 2003). A number of models have addressed SMEs adoption and implementation of ECT. Poon and Swatman (1997) proposed an earlier three stage model which describes the route for SMEs using the Internet to improve their strategic process. The transformation process starts with the interorganisational level as an entry point to the Internet. Integration with the business processes occurs subsequently; with full Internet-to-internal process integration ultimately presenting WKH JUHDWHVW EHQH¿W WR D FRPSDQ\ +RZHYHU WKHVHEHQH¿WVZRXOGRQO\EHDFKLHYHGIROORZLQJ VLJQL¿FDQW RUJDQLVDWLRQDO SURFHVV DGMXVWPHQW within the company and across the business VHFWRULWRSHUDWHV*UDQW SUHVHQWHGD¿YH stage model of e-commerce maturity: immaturity, on the Internet, e-commerce strategy decided, ready to implement, and integrated and effective e-commerce. Grant’s model focuses on the internal characteristics and readiness of the small business. Gide and Soliman (1999) proposed a three stage model for Internet implementation. The three stages are distinct and interrelated. 7KH¿UVWVWDJHLVFRQFHUQHGZLWKFUHDWLQJD:HE presence which provides corporate information and delivers marketing and promotional material to potential customers. The second is the e-commerce stage, where the company conducts some of their transactional operations via the Web presence. Finally, the e-business stage, when the company decides to embark on full-scale business activities using the Internet. Willcocks and Sauer (2000) proposed a four VWDJHHEXVLQHVVPRGHO³PRYLQJWRHEXVLQHVV´

422

that aids the evaluation of company’s e-business strategy. They argue that though Internet systems are important, value rises once businesses use their knowledge and experience to produce outputs accessible through the Internet. The potential for transformation emerges once businesses recognise the need to reorganise processes and focus on core competencies. Initially companies use some basic Internet tool such as Web pages, before moving to stage 2—transacting business. At stage 3, companies recognise that changes to processes, structures and skills are necessary to exploit the new technology. Stage 4 is only reached once they see the business can transcend its existing products and use the Internet to develop new markets and products. A similar but less detailed model is used by the DTI UK. The DTI uses the ³e-adoption ladder” to model the transformation from basic access to ICTs through to more sophisticated use (DTI, 2002). Companies go through a number of steps from using e-mail for messaging, to Web site for online-marketing, to e-commerce for online ordering, to e-business for online payPHQWDQG¿QDOO\WUDQVIRUPHGRUJDQLVDWLRQZKHUH e-commerce supports the business relationship between a customer and a supplier. All of the above models provide a generic description of the different stages in adopting varies aspect of ECT. However, they do not explore the IDFWRUVLQÀXHQFLQJLPSOHPHQWDWLRQRI(&7ZLWKLQ WKHEXVLQHVVRUWKHDFWXDOIDFWRUVWKDWLQÀXHQFH the transition from the initial stage of Web site adoption to more advanced stages. For example, the DTI model provides a useful sense of technological progression, however, it is criticised for being rather too linear to fully describe processes that are often nonlinear and complex (Gray & Lawless, 2002). Sparrow (2001) argues that there is no evidence that the DTI ladder represents evolutionary steps in the processes by which SMEs transform themselves into e-businesses. Neither does the model provide an account of how ICT alters the scope of what SMEs can do, or the huPDQUHVRXUFHVRUWKH¿QDQFLDOGLPHQVLRQVWKDW are vital for successful adoption.

SMEs ECT Reality

Despite all the literature on EC adoption there is limited attention to the process of EC implementation (Chan & Swatman, 1999), no coherent model or theory bearing the issues of the management of Web technologies (Rahul De’ & Mathew, 1999), and sparse literature looking at Web site practices (Murphy, Poist, Lynagh, & Grazer, 2002). Web site development is a growing aspect in IT activities within many organisations; however, the manner in which Web site development actually takes place within organisations is still largely uncertain (Taylor, McWilliam, Forsyth, & Wade, 2002). Moreover, the skills and knowledge required by IT practitioners for successful Web site development are still largely unknown (Taylor, England, & Gresty, 2001). This gap of knowledge is particularly important in the context of SMEs. SMEs, particularly micro and small companies, differ from large organisations due to their size which imposes limitation in number of staff, lack of formal IT department, and lack of technical resources and time. SMEs are managed in a personalised fashion, where the owner-manager plays a number of roles within the company from managing the business to managing accounts and information technology (Palvia & Palvia, 1996) and more recently the owner-manager is the actual developer of a Web presence. This new role has been encouraged by the media attention, peer competition, fear of being left behind, and the plethora of Web editing tools and ease by which a Web presence can be developed. The introduction of e-commerce to the company requires the introduction of new competencies, new practices, and a degree of organisational restructuring (Windrum & De Berranger, 2003). Implementation occurs when an individual (or other decision making unit) puts an innovation into use (Rogers, 1995). Implementation involves overt behavioural change, as the new idea is put into practice. The scenario of Web presence implementation by SMEs differs from that of any IS/IT systems. In the case of IS/IT, SMEs

do not have the competence to develop their own software systems such as accounting or stock PDQDJHPHQW RU PDNH PRGL¿FDWLRQ WR H[LVWLQJ ones. Companies tend to acquire and implement standard software where implementation is the actual use of the system (Jansen, 1998). However, in the case of the Web presence, basic knowledge RI+70/DQGVRPH:HEHGLWLQJWRROVLVVXI¿cient for developing, updating and maintenance a Web presence within a company with limited support of external assistance (Taylor, England, & Gresty, 2001). Fillis, Johansson, and Wagner (2003) promote the need to understand how internal and external factors impose on e-business DGRSWLRQDQGGHYHORSPHQWLQWKHVPDOOHU¿UPV They argue that many programmes of e-business assistance tend to offer general advice rather than WDLORUPDGHVSHFL¿FLQIRUPDWLRQZKLFKLVUHOHYDQW in micro and small SMEs. Implementation in the context of this chapter is not limited to the use of Web presence for commercial activity, but extends to SMEs’ hands-on experience in Web site development, update and management. The chapter aims to explore the various Web site development and management SUDFWLFHVWKDWKDYHDGLUHFWXQGHUO\LQJLQÀXHQFH on e-commerce implementation within SMEs. The remaining part of the chapter will present the methodology used to capture SMEs’ implementation practices, the background information of the companies that participated in the semi-structured interviews, and the history of Web presence implementation. Furthermore, the chapter presents the various interacting factors WKDWLQÀXHQFH:HEVLWHGHYHORSPHQWSUDFWLFHVDQG the emerging implementation patterns.

METHODOLOGY Eleven companies participated in the study. The criteria for SMEs selection include: the companies are within the same geographic area in the Northwest of UK, the companies’ Web sites are hosted at

423

SMEs ECT Reality

the same Web directory or ISP, and the companies’ willingness to participate in the study. A series of questions were prepared, and each manager was personally interviewed using a semi-structured interview format. Semi-structured interviews FDOOIRUDVSHFL¿FOLVWRITXHVWLRQVWREHDVNHGLQ DVSHFL¿FRUGHUEXWSHUPLWVWKHLQWHUYLHZHUWR ask optional questions, pass on others, and depart EULHÀ\WRIROORZXQH[SHFWHGSDWKV/LQGORI  The semi-structured interviews were conducted in the SME premises with the owner-manager or a similar decision maker, for example a partner or marketing director. Each interview lasted an hour. Interviews were both noted and tape-recorded, and then transcribed. Understanding of the problems and conceptualisation improved as more companies were interviewed. The analysis of the semi-structured interviews took the form of hierarchical coding using template analysis as described by King (1998). Hierarchical coding enables the analysis of text at varying OHYHOV RI VSHFL¿FLW\ 7KHPHV LQ WKH LQWHUYLHZV were coded and grouped, thus forming groups of similar codes clustered together to produce a more general higher order codes. A pragmatic decision was made to stop the process of developing and modifying the analytical template, when there where no relevant sections of transcript uncoded, and there was a clear understanding of what each code meant (King, 1998). Broad, higher codes give an overview of the general direction of the interview, while detailed lowerRUGHUFRGHVDOORZIRUWKH¿QHGLVWLQFWLRQVERWK within cases and between cases, thus enabling a within and between groups comparison (Miles & Huberman, 1994).

BACKGROUND OF PARTICIPATING COMPANIES SMEs that participated in the semi-structured interviews were selected from a Web directory, ³MerseyWorld”, that was part of a European

424

funded project, managed by Connect. Connect DFWHGERWKDVD³F\EHUPHGLDU\´DQG,63WKURXJK the MerseyWorld site (Charlton, Gittings, Leng, Little, & Neilson, 1998), as well as a change agent (Charlton, Gittings, Leng, Little, & Neilson, 1997). As a change agent, Connect was responsible for the diffusion of Internet. The primarily concern was providing businesses with the necessary Internet knowhow to effectively exploit the technology and bring businesses onto the Internet. This was performed through Awareness Days, Short Course Programmes, The MerseyWorld Site, and its Work Experience and Work Placement SURJUDPPHV$VD³cybermediary” through the MerseyWorld site, Connect aimed at marketing the electronic potential of the Merseyside region. A Web presence was developed for businesses based on information submitted in any format. Connect employed programmers, designers and system specialists to develop the Web sites. Any company could join MerseyWorld, whether it KDGDQH[LVWLQJ:HESUHVHQFHRUQRW7KH¿UVW 12 months were free of charge irrespective of the level of service the company chooses. Starting from the second year charges were incurred depending on the type of service selected. At the time of conducting the interviews, all SMEs hosted their Web presence on MerseyWorld. All interviewed companies have between two and four years experience with the Web presence. The interviewed companies fall within two groups (Elsammani, Hackney, & Scown, 2004; (OVDPPDQL  6FRZQ   7KH ¿UVW JURXS is Need Pull (NP) SMEs that had the initiative to develop their own Web presence, either inhouse or through a Web design bureau, before approaching the change agent. NP SMEs were attracted by the services offered by the change DJHQW³HVSHFLDOO\VXEPLVVLRQWRVHDUFKHQJLQHV attractive,” and were encouraged to host their site in the MerseyWorld directory. The second group is Technology Push (TP) SMEs. These companies were pushed into adopting a Web presence, mainly through the change agent efforts in awareness

SMEs ECT Reality

creation and free Web design and hosting. TP 60(V UHSRUWHG WKDW ³IUHH :HE GHVLJQ ZDV WKH main incentive in adopting a Web presence at WKHWLPH´DVWKH\GLVFRYHUHG³WKHFRPSOH[LW\RI Web design and development while attending the awareness courses.” The majority of participants were small companies with up to 25 employees, and only one company was medium sized (case 11). The semi-structured interviews were conducted in the SME premises with the owner-manager or a similar decision maker, for example, a partner or marketing director (case 11, case 3, case 7, case 2). The interviewed owner-mangers where PRVWO\PDOHVZLWKWKHH[FHSWLRQRIWKUHH¿UPV where owner-manager was female (case 7, case 8, FDVH $OO¿UPVZHUHLQGHSHQGHQWO\RZQHGDQG were not in partnership with larger organisations. Generally, the interviewed companies are mature companies established for more than six years, with the exception of one young company (case 8) established for less than three years. Overall, the sample is a mixture of business-to-business (B2B) and business-to-consumer (B2C) companies. Most companies operate in local and national markets, with the exception of two companies that have international clients and customers (case 3 and case 7). Companies come from a diversity of industry sectors: manufacturing, retail, real estate, DQG¿QDQFLDOLQWHUPHGLDWLRQ7DEOHSURYLGHVDQ overall presentation of participants in the semistructured interviews.

IMPLEMENTATION HISTORY NP SMEs and TP SMEs mainly differ by where the Web presence was initially developed and in the years of experience with the Web presence (see Table 1). NP SMEs have been internally motivated, either by the owner manager or a member of staff. Their initial adoption decisions was LQÀXHQFHGE\WKHLGHQWL¿HGEXVLQHVVQHHGDIWHU experiencing the advantages of using e-mail for

communication and observing the fast adoption of the new technology. These companies own a Web presence between three and four years. They developed their initial Web site either in-house or approached a Web design bureau. Contrary, TP SMEs own a Web presence for two to three years. They have been externally motivated by the change agent’s efforts in the diffusion of ECT. TP SMEs initial Web site was developed by the change agent, hence their initial adoption GHFLVLRQ ZDV VWURQJO\ LQÀXHQFHG DQG OLPLWHG by the services provided by the change agent or perceived change agent. Within the two to four years of ECT adoption, most NP SMEs and TP SMEs subsequently redesigned and developed a number of Web sites with the exception of three companies. Two TP SMEs (case 1 and case 2) still use the same site developed by the change agent, and one NP SMEs (case 3) where the site was originally developed by an enthusiastic member of staff, but the company lost interest in further investment in the Web presHQFHDVLWZDVRIQRVLJQL¿FDQFHWRWKHFRPSDQ\ Web site update and management was either done in-house by owner-manager and/or members of staff, or outsourced to a Web designer and/or the change agent. Reasons for subsequent Web site redesign and development include: update Web site functionality (NP case 5, NP case 6, TP case 8), keep customer interest (NP case 4), improve Web site aesthetics (TP case 7, TP case 1), and the site developed by change agent was basic (TP case 9, and TP case 10). Table 2 provides a summary of SMEs’ Web site implementation and subsequent redesign. Although NP and TP SMEs differed in their initial adoption decision and Web site development, evidence shows that overtime, there is an overlap in their subsequent development and management practices. A retrospective analysis of WKHLULPSOHPHQWDWLRQEHKDYLRXUUHÀHFWVDQXPEHU of patterns in the allocation of resources, development process, and strategic planning. These SDWWHUQVDUHQRWVSHFL¿FWRHLWKHUJURXSDOWKRXJK

425

426

Managed by (gender)

Partnership (male)

Partnership (male)

Owner-manager (male)

Owner-manager (male)

Owner-manager (male)

Partnership (female)

Partnership (male)

Owner-manager (female)

Owner-manager (male)

Owner-manager (male)

Owner-manager (female)

SMEs

Case 11

Case3

Case5

Case6

Case4

Case7

Case2

Case8

Case9

Case10

Case1

Micro (5 employees)

Micro (2 employees)

Micro (3 employees)

Micro (2 employees)

Small (30 employees)

Small (12 full time + 60 part-time)

Micro (3 employees)

Small (20 employees)

Small (25 employees)

Small (25 employees)

Medium (50 employees + 60 part-time)

Number of employees

B2C

B2C

B2C

B2C

B2B

B2B

B2B & B2C

B2C

B2B

B2B

B2C & B2B

Business Activity

Retail Sale of Clothing

Retail of Music Records

Retail Trade of books

Manufacture of Textile and Textile Products

Financial Intermediation; business insurance

Real Estate, Renting & Business; labour recruitment

Manufacture of Textile and Textile Products

Other social & personal services

Real Estate, Renting & Business; renting out equipment

Financial Intermediation; business insurance

Manufacture; Publishing

Industry

National

National

National

National

Local

International and national

National

National

National

International and national

National

Market

3 years

3 years

2 years

3 years

2 years

2 years

3 years

4 years

3 years

3 years

3 years

Years of Experience with Website

Change Agent (Connect)

Change Agent (Connect)

Change Agent (Connect)

Change Agent (different than Connect)

Change Agent (Connect)

Change Agent (Connect)

ISP (different than MerseyWorld)

In-house by ownermanager

In-house by ownermanager

In-house by ownermanager

In-house by IT Staff

First Website Developed by

TP

TP

TP

TP

TP

TP

NP

NP

NP

NP

NP

NP/TP

SMEs ECT Reality

Table 1. Description of SME participants in semi-structured interviews

Initial Website developed

In-house by IT Staff

In-house by ownermanager

In-house by ownermanager

ISP (other than MerseyWorld)

In-house by ownermanager

Change Agent (Connect)

Change Agent (Connect)

Change Agent (different than Connect)

Change Agent (Connect)

Change Agent (Connect)

Change Agent (Connect)

NP/TP SME

Case11 (NP)

Case3 (NP)

Case5 (NP)

Case4 (NP)

Case6 (NP)

Case7 (TP)

Case2 (TP)

Case8 (TP)

Case9 (TP)

Case10 (TP)

Case1 (TP)

3 years

3 years

2 years

3 years

2 years

2 years

4 years

3 years

3 years

3 years

3 years

Years of Experience

Current (second) site developed by amateur web designer but is hosted it at MerseyWorld web directory

Developed in-house a new website which is hosted in three different ISPs with three different domain names

Immediately, owner-manger started changing and re-designing the site developed by Change Agent.

Update products, look and feel

Site developed by change agent was too basic

Not happy with site initially developed by change agent

Add functionality e-commerce and online diary of events

No urgent need to re-design

6WLOOXVHVWKH¿UVWVLWHGHYHORSHGE\&KDQJH$JHQW Current (second) website by Change Agent, third site under construction for the last six months slow progress due to communication problems with designer

Change the look and feel of the site

Add online quoting system, free service of student scheme

Keep customer interest. Need new domain name

They had a number of false starts with local design companies. Final site is developed by Web design bureau but is hosted on MerseyWorld

Current (second) website developed last year by a university student. Still not functioning

Three times a year the site is re-designed and updated

Two sites are running simultaneously on MerseyWorld. Each has different functionality. Both sites designed and developed by owner-manager

Add e-commerce solution, waiting one year for response from Connect

Outsource update due lack of skills. Update yearly.

Continuous update and re-design of website by owner-manager

Update and management by ownermanager

Out source day-to-day management and redesign of the site. Owner lacks skills

Day-to-day update by management

Day-to-day update by admin staff. Out-sourced the re-design of website

Update yearly by owner-manager

On going update and re-design by owner-manager

Owner-manager IT person and tidies the site every 3-4 months

No point in update

1RWVLJQL¿FDQWWRWKHFRPSDQ\

Thinking of developing a second site. Will outsource development to a web designer

Update by MD or IT staff. Outsource re-design to Connect

Lately, management directed attention towards website

&XUUHQW¿QDO VLWHGHYHORSHGE\&RQQHFWXQGHUWKH supervision of Marketing Director (MD)

Update and management

Reasons for subsequent re-design

History of Websites Adopted

SMEs ECT Reality

Table 2. Historical account of initial Web sites implementation and subsequent re-design

427

SMEs ECT Reality

some behaviour might be more dominant in one group than the other. Some companies, irrespective of whether they are NP or TP, prefer to be self-reliant and depend on internal resources, while other companies prefer to outsource. Some SMEs (particularly NP SMEs) are active adopters that dynamically add changes to Web presence functionality, while other companies (mostly TP SMEs) take a more passive stance by limiting Web site changes to update of informaWLRQ7KHFKDQJHVPDGHE\DFWLYHPRGL¿HUVDUH not always driven by strategic planning, but are based on ad-hoc decisions and choices to gain WDQJLEOH EHQH¿WV DQG FRPSHWLWLYH DGYDQWDJH Contrary, passive adopters had limited impact on the Web presence maintenance and their Web presence is either updated sporadically mainly to update content, or the Web presence is in a static state with minimum or no update. Table 3 gives a details account of each interviewed company and the development patterns that inform their implementation behaviour. The remaining part of this section discusses these patterns and the LQÀXHQFLQJIDFWRUV

Outsource vs. In-House (Self-Reliance) Web site management can be viewed from two perspectives: the update and management of dayto-day information, and the major design changes. 0RVW 60(V DFTXLUHG VXI¿FLHQW Web authoring skills to aid them in managing the Web presence, either due to owner-manager’s personal interest in Web authoring or through the change agent awareness and knowhow training. NP SMEs updated their site on a daily and monthly basis, contrary to TP SMEs who update their site on a quarterly or yearly basis. In most companies, both TP SMEs and NP SMEs, day-to-day updates are usually managed in-house whether by own-manager or other in-house staff, with the exception of two companies (TP case 1, and TP case 8) that outsource day-to-day updates (see Table 2).

428

We update if there is something major, if we are doing a new product. I will change it but in a general sense I probably tidy it up, make a few changes to make it look different if nothing else, probably every two/three months. (NP case 5) …as far as the majority of the actual text information is concerned, we have the ability to change it from here. As far as any interactive screens are concerned, we don’t and obviously we’re going to go back to [Web design Bureau] for that. (NP case 6) I think I might have been tempted originally if ,ZDVÀXVKZLWKPRQH\EXW,¶PDOPRVWSOHDVHG WKDW,ZDVQ¶WÀXVKZLWKPRQH\DWWKHEHJLQQLQJ because it taught me how to do it myself, I mean very amateurishly really but the thing is, it is working and it’s selling books. (TP case 9) 60(VWKDWDUHFRQ¿GHQWZLWKWKHLU:HEDXWKRULQJVNLOOVGRQRW¿QGWKHQHHGWRHPSOR\PRUH staff to manage the site. For these companies outsourcing, Web site maintenance and subsequent redesign, to external professional Web design companies is not a solution they have considered. SMEs’ preference to depend on internal resources, rather than approach a professional Web design company, is driven by: fear of high maintenance FRVWVODFNRIMXVWL¿FDWLRQIRUFRVWVIRUFRQWLQXRXV update, lack of trust in designers’ capability, fear of losing control over the Web presence, and lack of time to liaise and communicate with designer. These factors are evident from the following statements. Basically the cost really, to get a professional Web design company to do it, doesn’t warrant the actual expenditure really I don’t think because what’s there is ok and if we went to a professional company, all they’d do is, they’d still be asking us for more photos and more graphics, they wouldn’t be going out taking pictures of our events, so it’s

Years of Experience

3 years

3 years

3 years

3 years

4 years

2 years

2 years

3 years

2 years

3 years

3 years

NP/TP SME

Case11 (NP)

Case3 (NP)

Case5 (NP)

Case4 (NP)

Case6 (NP)

Case7 (TP)

Case2 (TP)

Case8 (TP)

Case9 (TP)

Case10 (TP)

Case1 (TP)

Resources

3

3

3

3

3

3

Outsource

3

3

3

3

3

3

3

3

In-house

3

3

3

3

3

3

3

3

3

3

3

$FWLYH0RGL¿HU

Development Process Passive Adopter

3

3

3

3

3

3

No Planning or Ad-hoc Planning

3

3

3

3

3

Tendency for Strategic Planning

Planning

SMEs ECT Reality

Table 3. Implementation patterns of subsequent Web presence implementation

429

SMEs ECT Reality

just paying them to put it on the screen correctly and I can do that anyway. (NP case 6) We’ve got a couple of new pictures to go on it and we’ve had to change the title on the top of every page because the designer that did the original site didn’t use a recognised sponsor, I’ve been through SKRQHQXPEHUVDQG,FDQ¶W¿QGKHUVKH¶VOHIW the University, I can’t track her down and I got to a point where I’d spent a couple of days trying WR¿QGKHUDQG,MXVWWKRXJKW,¶PZDVWLQJWLPH here, bugger it, we’ll just change every heading instead, so we just came back and just changed every heading. (NP case 4) Although most NP SMEs are capable of performing major aesthetic design changes internally within the company, they tend to depend on external expertise as they implement more complex ECT solution. For example a NP SMEs (case 5) has two ongoing Web sites, a catalogue site and an e-commerce site which was developed with the help of change agent. The e-commerce site is online for more than a year but is not functioning effectively. The owner-manager is waiting for the change agent to resolve the technical problem and provide adequate EC solution. We have two Web sites, we have a catalogue, a magazine if you like … and we have an email, e-commerce thing …The e-commerce site is SQL server-based which means that if you actually click it, you call up a database, a pick list if you like and it is slow and we are talking just now to [Consultant at Connect] he can improve potential customer access to it in terms of speed of delivery. … so we have had business through the catalogue but not through the e-commerce site … it is enquiries that lead to business but not directly, there is always a second stage in it, we are not directly selling from the e-commerce site at all, hence our continued discussions with Connect about its effectiveness. (NP case 5)

430

In comparison to NP SMES, TP SMEs tend to depend more on external expertise, e.g., the Web design bureau as well as designer at the change agent. Some TP companies (TP case 8 and TP case 1) have not reached a stage of self-reliance and depend on the change agent’s services for day-to-day update as well as subsequent redesign. This can explain why the majority of TP SMEs XSGDWHWKHLUVLWHTXDUWHUO\RU\HDUO\DQGDVLJQL¿cant number of TP SMEs were not aware of how frequent or when the site will be updated. Moreover, TP SMEs dependence on the change agent (or perceived change agent) is driven by the cost for redesign and trust in designer (change agent) rather than evaluation of possible EC solution or services provided. We have just designed another one [site] ... I’ve done the pictures and all that stuff… I asked Connect to price this for me and at last the count was £1,700 and rising… so I went across the road to a computer place that does computers he’s going to charge me £300 against £1,700 and rising… so there’s a big difference. (TP case 1) Now having done it [site] and having seen that there are 200,000 people around the world who now know there’s a company called [name of business] in the Wirral, I’m quite happy and I’m prepared to pay for it to be refreshed because those are the people [Connect] who have helped us and I trust them, at the end of the day it’s my company. (TP case 2) In summary, most NP and TP companies are capable of conducting day-to-day updates, but there is a tendency to outsource major Web site redesign especially with the increase in complexity of Web site functionality. This pattern is evident in the more technically capable NP SMEs. The less capable TP SMEs tend to outsource most Web site management whether day-to-day or subsequent redesign of a new site. SME’s choice RI:HEGHVLJQEXUHDXLVEDVHGRQWKHMXVWL¿FDWLRQ

SMEs ECT Reality

of costs and trust (or lack of trust) in external professional support and services.

3DVVLYH$GRSWHUYV$FWLYH0RGL¿HU The majority of NP SMEs have developed their Web presence in-house and have control over their adoption decisions. These companies are mostly DFWLYH PRGL¿HUV 7KH\ KDG LQLWLDOO\ GHYHORSHG their Web site either in-house or approached a Web design bureau. Most NP SMEs continue to manage and update their Web presence on a regular daily or monthly basis depending on their internal resources. These companies are technologically self-reliant in Web authoring using Netscape, HTML, and Dreamweaver. Most redesign and update, performed in-house, is apparent at the aesthetic and layout level of design rather than improving functionality. This behaviour is carried on to the subsequent development and redesign phases (see Table 2). The majority of NP owner-managers took a pragmatic and short-term approach to Web site development. Owner-managers update and redesign the site, on a daily and monthly basis, as and when they felt the need to add changes. 7KLV IUHTXHQF\ RI XSGDWH LV PRVWO\ LQÀXHQFHG by owner-manager’s enthusiasm and interest in Web authoring, as well as, their personal view on the quality of the Web site after comparison with competitor’s Web sites. Moreover, in some FDVHVRZQHUPDQDJHUVKDYHLGHQWL¿HGDEXVLQHVV need to update the content and the feel of the site. Thus, the Web presence is not developed at one stage, but redesigned and updated frequently due to management enthusiasm, technical self-reliance, perceived knowledge of Web authoring, and SHUFHLYHGEHQH¿WVJDLQHGIURPDGRSWLRQ I am the IT man. I have Netscape and Internet Explorer at home and I check if the colours are ¿QH%HFDXVHDQ\RQHFDQGHVLJQD:HEVLWHDQ\RQH can sit and use Internet Explorer. Companies are UH¿QLQJDQGXSGDWLQJDOOWKHWLPH«,WLG\LWXS

every 3-4 months…I’ve got WSFTP at home and here, so this weekend I’ll pull that down and make the amendments and then resubmit it. I’ll do that during the course of the weekend. (NP case 5) We’d already done one, a very, very crude one ourselves. When we got an ISP, we got the free Web space, so we’d done one, a very crude one [site] that was Merseynet, our ISP which is the local ISP…it was a mess, it was very crude and not very well laid out, we didn’t know anything about it. Then we found out about the Internet courses at Connect, we went on them and at the time Connect were actually doing a free design service which we took up, we got a free Web site designed by one of their 3rd or 4t h year students and then we started going on html courses, Java Script courses and gradually we’ve just changed it completely. (NP case 4) It’s as much amusement as anything else but we advertise the Web site all the time…we’re getting around 3,500 hits a month, something like that. So even if we don’t get anything back from it, we’re still advertising in the same sense as a billboard poster or a newspaper advert, you don’t necessarily get anything back but you’ve got to just assume that it’s going somewhere to someone who’s interested, certainly in the keywords that are coming up on the searches. The end result is YHU\GLI¿FXOWWRVHH(NP case 5) Most TP SMEs can be described as passive adopter, where the initial Web presence was developed by change agent and their choice of Web VLWHZDVVWURQJO\LQÀXHQFHGDQGOLPLWHGE\WKH offers provided by the change agent (TP case 1, TP case 2 and TP case 8). Some TP SMEs (case 8 and case 1) continue to be passive adopters and outsource the update and management as well as the development of their subsequent Web sites. Other TP SMEs still use the same Web site developed initially by the change agent, with minimum update of Web site content in their three years of

431

SMEs ECT Reality

adoption (TP case 1 and TP case 2). TP SMEs update their site mostly on an ad-hoc manner based on circumstance or resources. These companies do not see the need to redesign. In particular, one company (TP case 2) is not thinking of redesigning another site, and in case they did, they will approach the change agent. How we came to launch it was, we actually got contacted by Liverpool University who said that they had European funding available for companies on the Merseyside area, to help them to develop Web sites and they have an organisation called Connect at the University and it’s very good and the upshot was that we went along one day and had a long conversation about the Internet and they would design and launch the Web site for us which they have done…for the amount of money that we would pay Connect, it’s not worth it [in-house management of the site]. It’s something being better off outsourced and our sense of design is terrible…I’m quite happy and I’m prepared to pay for it [Web site] to be refreshed because those [Connect] are the people who have helped us and I trust them, at the end of the day it’s my company. (TP case 2) Nonetheless, some TP SME (case 9 and case  EHFDPHDFWLYHPRGL¿HUVE\DFTXLULQJ:HE authoring skills. One owner-manager (TP case  ZDVQRWVDWLV¿HGZLWKWKH:HEVLWHGHYHORSHG by the change agent and redesigned a new Web site within a short time from receiving that site. The Web authoring knowledge and skills, gained from change agent training and owner-manager personal efforts, were used in tearing out the Web presence developed by the change agent and redesigning a new site. …I took the course and realised how much there was to know and I went for the deal of a free Web site design which I think involved half a day’s consultation and then a day’s Web site design from them and wasn’t at all pleased with the job that’s

432

has been done for me…In a sense I got what I asked for, on the home page but I got things that I did not ask for or did not want. On the subordinate pages I did not get the links I wanted and I got over fancy designs…so I rewrote the links and eventually developed the site…from the courses, we were allowed to develop it ourselves and it’s grown to about 65 pages now. They don’t offer help, they will give you help if you ask, but you need to ask. (TP case 9) ,QVXPPDU\1360(VDUHDFWLYHPRGL¿HUV who have the technical knowhow, Web authoring skills, and technological awareness to update and redesign their Web presence. Contrary, most TP SMEs can be described as passive adopters with limited Web authoring knowledge and technical ability, and who depend mostly on external sources for management and update. Although, two TP 60(VEHFRPHDFWLYHPRGL¿HUVPDQDJLQJWKHLU own Web presence, however, most companies within this group tend to remain passive adopters (see Table 3).

Ad-Hoc Planning vs. Strategic Planning Whether SMEs are passive adopters or active PRGL¿HUV WKHUH LV DQ LPSOLFLW DVVXPSWLRQ LQ literature that the effectiveness of a Web site is dependent on a clear link between objectives, planning/strategy and Web site design and functionality (McNaughton, 2001; Wen, Chen, & Hwang, 2001). Strategy entails the deployment of resources to achieve organisational aims and objectives (O’Regan & Ghobadian, 2004). Strategic planning relates the activities of an organisation to the mission and goals that should guide the organisation’s activities and provides a basis for the allocation of resources to a project and for its evaluation (Clyde, 2000). In the case of Web site development, strategic planning process provides DEDVLVIRUWKHLGHQWL¿FDWLRQRIWKHUHVRXUFHVDQG skills that are needed at each stage of the Web

SMEs ECT Reality

presence development and maintenance (Clyde, 2000). $FWLYH PRGL¿HUV 60(V DUH FRPSDQLHV WKDW reached a stage of self-reliance in managing their Web presence. These companies are more advantageous in their development and maintenance practices. They are keen on experimenting with different ECT solutions and scenarios. The Web site is in a continuous state of update and redesign. The aim is not only the update of content and product information, changing the feel and look of the site to attract customers and increase sales, but also adding new functionalities to the site (see Table 2). These owner-managers compare their Web site with competitors’ Web sites and try to improve their Web presence to gain competitive advantage. However, in most cases the choice of changes made to the site and ECT solution, is not the result of strategic planning but more of ad-hoc decisions based on peer views and owner-manager’s Web authoring skills and resources. That was something I slipped in because somebody said to me that if you’re selling stuff on the Internet you need to have a returns procedure as well which I didn’t think about to be honest. Yes, I’ve been told it’s just business etiquette, it’s nice to have a returns procedure and a policy but I never really thought about it. (TP case 10) 6RPHDFWLYHPRGL¿HUVKDGWKHLULQLWLDO:HE presence developed by professional Web design bureau. These companies depend on in-house resources for day-to-day update and management of the Web site content but outsource major redesign to professional Web design companies. These companies show a clear link between the business objective to attract customers to the site, and the maintenance activities that include changes to the improve Web site aesthetics. However, in most scenarios, this link indicates a tendency towards strategic planning but no active steps have been

taken towards incorporating a strategy to their business activity. … we add so much in and because it’s constantly changing, because we react all the time to what people are asking for, that we’d end up paying RXW ¿YH RU VL[ WLPHV D \HDU WR KDYH LW FKDQJHG plus we’re both of the opinion that it needs to be changed at least three times a year just to keep people coming back to it. I mean if they keep going in and it’s the same page and it’s the same this and it’s the same pictures, it gets boring, you’ve just got to keep changing it. (NP case 4) $FWLYHPRGL¿HU60(VDUHDZDUHRIWKHQHHGWR develop e-business strategy to achieve maximum EHQH¿WVIURPWKHLU:HESUHVHQFHKRZHYHUWKH\ need the support and consultation of external expertise to help them develop a strategy. I think we perhaps need more consultation on how to develop our company and the model of ZKDWZHGRWR¿WLQZLWKWKLVQHZWHFKQRORJ\VR that it’s not just something that we can say, oh we’ve got a Web site because the whole world’s got a Web site but it’s something that does actively work for us and increase the revenue, reduce the cost, something that has a positive effect for us rather than just something that sits on a Web page somewhere. (NP case 7) Only one NP SME case 11 (a publishing company) had implemented a brand building strategy to support the value of the magazine they publish. The Web site provides information to the current magazine readers as well as other potential business advertisers on the magazine. This enhances the communication between their customer and potential advertising companies. The Web site supports the magazine, but does not replace the magazine published, which is the company’s main product.

433

SMEs ECT Reality

Well we’ve had some sort of Web presence for quite a long time, about three years but we had made progress over that period and redesigned the site a number of times but we’d not taken it seriously enough, I don’t think until probably this year when we put a little bit more money into it and really looked to it as something which would support the value of the brand of magazine itself which is [magazine name]. It’s the only magazine (…) publishers and the Web site was designed around two themes in terms of supplementing the brand itself, one was to provide additional information on the product to the consumer and the second was to provide information to other businesses for example, potential advertisers in the magazine, that sort of thing, contact details, up and coming events, readers holidays and so on, some of which they get through the magazine. We deliberately don’t put magazine content online, the idea is that people pay for it and we see the site at the moment as being free access. (NP SME case 11). Quayle (2002) argues that SMEs that developed e-commerce capabilities have not done so VWUDWHJLFDOO\DQGKDYH\HWWRHQMR\VLJQL¿FDQWFRVW and time savings. This is evident from NP SME (case 5) who owns two Web sites; a catalogue and an e-commerce site which is not fully functional. The owner-manager is in continuous discussions with the change agent to provide a technical solution for the e-commerce site. It can be argued that developing e-commerce capabilities does not depend only on internal factors, but equally depends on the availability of external support and type of ECT solutions provided and accessible to SMEs. We have two Web sites, we have a catalogue, a magazine if you like … and we have an email, e-commerce thing. The e-commerce site is SQL server-based which means that if you actually click it, you call up a database, a pick list if you like and it is slow and we are talking just now to [Consultant at Connect] he can improve potential

434

customer access to it in terms of speed of delivery. So we get sales from it [site] but most of them are from the magazine where we get email contact with enquiries….so we have had business through the catalogue but not through the e-commerce site …it is enquiries that lead to business but not directly, there is always a second stage in it, we are not directly selling from the e-commerce site at all hence our continued discussions with Connect about its effectiveness… It’s still too slow but as I say that’s since last October, we’ve been trying to get that speeded up… [Consultant at Connect] is aware of it, he himself has in the SDVWEHHQWU\LQJWR¿QGVRPHRWKHUPHWKRGIRU speeding up the server but although I ask him on a regular basis, it’s never there next month and probably the month after, it’s not happening yet. (NP SME case 5) Contrary, passive adopters are companies that mostly outsource update, management and redesign phases. Some, passive adopters have gained Web authoring skills and manage minor content update. Their Web sites are in a sporadic state of content update depending on circumstances and resources. While other passive adopters update their site yearly; their Web sites are in a static state where limited or no content update is evident. These companies have not established a clear business objective for their Web presence, and they are not aware of the need for any strategic planning to incorporate into Web site development and redesign. These SMEs depend mostly on the change agent or perceived change agent efforts, and they invest limited resources in the development and management processes. These TP SMEs had limited involvement in Web site development and testing, and they continue to have limited impact in update and management. We just had the pictures and told them [Connect] what we wanted and they designed it…we could have done anything we wanted to but we just left it to them because we had no knowledge on it…We

SMEs ECT Reality

KDYHRQO\GRQHRQHFKDQJHZH¿QGLWYHU\GLI¿FXOW to make the changes ourselves…we tried to get in to change a price and we lost a picture and there was no way we could get that picture back, so I went to Connect for some support and they said, we’ll put it on for you this time but after this we’ll need to charge you further … [When asked if they would approach another Web design bureau]… Not really, it would be too much, we are paying about two hundred and something to stay with them a year to host the site, so we wouldn’t like to change. (TP case 1)

SUMMARY OF FINDINGS Findings presented in this chapter have shown that NP SMEs and TP SMEs differ to a large extent in their implementation process. NP SMEs are mostly internally motivated in their adoption decisions. Management enthusiasm and perceived EHQH¿WVIURPDGRSWLRQHQFRXUDJHGPDQ\RZQHU managers to gain awareness of the technology and improve their Web authoring skills, either through their personal efforts or through the change agent training. NP SMEs have a favourable opinion of the technology, initiate the development of their Web presence, and have more authority and autonomy in their adoption and implementation decisions. However, these decisions are limited by owner-manager Web authoring skills, technical knowhow, and knowledge of ECT solutions. Contrarily, TP SMEs are mostly externally motivated by the change agent efforts and support. TP SMEs adopted a Web presence without forming a favourable opinion of ECT. They mainly wanted to experiment with the new technology without any objective evaluation of their business needs and resource constraints. Their Web presence was developed by the change agent, and was mostly LQÀXHQFHGJRYHUQHGDQGOLPLWHGE\WKHVROXWLRQV provided by the change agent. SMEs implementation process can be grouped into four main categories: strategic planning, ad

hoc decisions, sporadic state, and static state. This categorisation is based on whether the company depends on internal resources or out-sources the development and management stages, and whether WKHFRPSDQ\LVDSDVVLYHRUDFWLYHPRGL¿HUStrategic Planning is evident in NP SMEs that had the initiative to develop their Web presence, and overtime developed a systematic approach to the Web site development and management. These SMEs outsource the redesign of the Web site, regard the Web presence as a strategic business tool, and intend to gradually incorporate ECT functionalities that meet their business needs. These SMEs have the chance of encompassing e-business. These companies are larger in size and outsourced the redesign and development of the successive Web sites. They have both technical and ¿QDQFLDOUHVRXUFHVWRPDQDJHWKHLU:HESUHVHQFH in-house. Furthermore, the owner-manager and staff are better trained in managing their ECT adoption. However, at the time of interview only one SME (NP case 11) falls in this category. Generally, most NP SMEs have a tendency towards strategic planning, as they have clear business objectives that govern their maintenance process. However, their implementation process is primarily based on ad hoc decision. Most NP SMEs fall within the ad hoc decision category. 7KH\ DUH DFWLYH PRGL¿HUV DQG DUH LQWHUQDOO\ motivated in developing and updating their Web presence. These companies have reached a stage of self-reliance, either through their personal interest in Web authoring and/or change agent efforts. These companies are actively and constantly FKDQJLQJ DQG XSGDWLQJ WKHLU VLWH WR UHÀHFW WKH company’s image and attract customer. Web site changes and updates are driven by owner-manager enthusiasm, knowledge of Web authoring skills, and relative advantage gained. These companies tend to take a pragmatic ad hoc approach to the development process. The choices of ECT solution adopted are based on the owner-manager’s individual judgment and experience. Although, these SMEs tend to outsource major redesign, however,

435

SMEs ECT Reality

they lack the resources to access professional advice and encompass strategic planning. Most TP SMEs fall within the sporadic state or static state. These are companies that are VWURQJO\ LQÀXHQFHG E\ H[WHUQDO IRUFHV QDPHO\ the change agent or any perceived change agent, in both their awareness and adoption of ECT. Companies within the sporadic state have gained ECT awareness, Web authoring, and knowhow, primarily due to the change agent efforts. SimiODUO\ WKH ¿UVW :HE VLWH DGRSWHG ZDV WKH GLUHFW result of the change agent services, in particular the free Web authoring and hosting services. These companies can be described as passive adopters, as they have limited technical skill to update Web site content and actively change Web presence functionality. They update their Web presence on a quarterly or yearly basis and tend to outsource any major redesign. Thus, their Web presence is in a sporadic state of content update. Companies within the static state, share similar implementation background as companies in the sporadic state. In addition, these companies have limited knowledge of Web presence development and management. They depend mostly on the change agent efforts in the initial Web site developed, Web site update and management, and subsequent redesign Web sites. These SMEs depend entirely on external support and Web site in a static state with minimum or no update. $QXPEHURIIDFWRUVLQÀXHQFH60(VFRQWLQXous adoption of a Web presence. Both NP and TP SMEs are encouraged to continue their adoption due to the perceived and experienced relative advantage gained, mostly from using the Web presence as a promotional and communicational means. NP SMEs are internally motivated by the owner-manager enthusiasm. The owner-manager is the main person developing and managing ECT. Peer pressure is motivating NP SMEs to adopt ECT, but does not encourage further investment of resources to develop a more competitive Web presence. Lack of time and lack of technical resources are among the common factors hindering both NP

436

and TP SMEs’ continuous adoption. Moreover, 7360(VDUHPRVWO\H[WHUQDOO\LQÀXHQFHGGXH to their dependence on outsourcing of Web site development and management rather than inhouse expertise. TP SME continuous adoption is affected by cost of Web presence maintenance and subsequent redesign, trust in change agent services, lack of trust in independent service providers, and lack of awareness of alternative ECT solutions, and their dependence on change agent support for further awareness. 7KH ¿QGLQJV SUHVHQWHG LQ WKLV FKDSWHU KDYH some limitations. Mainly, the data was collected IURP 60(V WKDW KDYH EHHQ LQÀXHQFHG E\ WKH change agent efforts in the diffusion of ECT; either directly as in the case of TP SMEs or indirectly as evident in NP SMEs. The presence of external FKDQJHDJHQWVLQÀXHQFLQJWKHDGRSWLRQGHFLVLRQV and implementation process, might limit the conclusions only to similar scenarios where the involvement of a change agent, or any perceived change agent, is paramount. Nonetheless, the ¿QGLQJVSUHVHQWHGDUHFRQVLVWHQWZLWKOLWHUDWXUH First, the factors that encourage implementation (e.g., management enthusiasm and relative advantage) and barriers to implementation (e.g., lack of resources, awareness, and trust) are in line with literature (Windrum & De Berranger, 2003), even in the presence of a change agent that provides LQFHQWLYHVWRHQFRXUDJHDGRSWLRQ6HFRQG¿QGings are in agreement with the argument that SMEs underestimate the need for planning prior to adopting e-commerce and that e-commerce strategy is missing from SME business plans (Quayle, 2002). Finally, it is argued that in absence of a strategic vision from within the company, external support can not always have the ability and desire WRSURYLGH³NQRZKRZ´NQRZOHGJHDQGDLGLQWKH formation of strategic planning (Jones, Hecker, & Holland, 2003). This is clearly evident in the ¿QGLQJVSUHVHQWHG7KHFKDQJHDJHQWSURYLGHG knowhow knowledge and aided in creating awareness, but did not aid in developing ECT strategic

SMEs ECT Reality

planning, even in companies that host their Web presence at the change agent’s Web directory and are in continuous contact with the change agent. However, contrary to literature, where implementation is presented as a linear stage-based process, the chapter presented a new dimension in SMEs implementation of ECT, based on the allocation of resources (in-house/outsourced), development process (passive/active), and management practices (strategic planning, ad-hoc decisions, sporadic state, and static state). Further research ZLOO EHQH¿W IURP LQYHVWLJDWLQJ ZKHWKHU WKHVH implementation patterns exist in the absence of change agent involvement in the implementation process.

REFERENCES

CONCLUSION

Charlton, C., Gittings, C., Leng, P., Little, J., & Neilson, I. (1998). Diffusion of Technological Innovations: Bringing Businesses onto the Internet. In T. J. Larsen & E. McGuire (Eds.), Information systems innovation and diffusion: Issues and directions (pp. 251-296). Hershey, PA: Idea Group Publishing.

This chapter unravelled a different dimension to SMEs implementation of electronic commerce technologies. The chapter focused on Web site development and management practices and explored the different Web presence implementation patterns among SMEs. Two distinct groups RI60(VDUHLGHQWL¿HG7KHPRUHDEOH1HHG3XOO SMEs, who are aware of their business needs and internal resources in developing and maintaining their Web presence. These companies update and manage their Web presence based mostly on owner-manager’s ad-hoc decisions and have a tendency towards strategic planning. Contrary, the less able Technology Push SMEs, who have EHHQLQÀXHQFHGDQGHQFRXUDJHGWRDGRSWD:HE presence by change agent efforts in the diffusion of ECT. These companies gained ECT awareness and some level of technical knowhow, due to change agent training. However, these companies lack the technical knowledge to maintain their Web presence in-house and depend largely on external support, particularly the change agent. Their Web presence is either in a sporadic or a static state of update and maintenance.

Chan, C., & Swatman, P. M. C. (1999, November 29). E-commerce implementation in Australia: A case study approach. In: “CollECTeR’99”—3r d Annual CollECTeR (Collaborative Electronic Commerce Technology and Research) Conference on Electronic Commerce, Wellington, New Zealand. Charlton, C., Gittings, C., Leng, P., Little, J., & Neilson, I. (1997, June 25-27). Diffusion of the Internet: A Local Perspective on an International Issue. In IFIP TC8 WG8.6 International Working Conference on Diffusion, Adoption and Implementation of Information Technology, Ambleside, Cumbria, UK (pp. 337-351), Chapman & Hall.

Clyde, L.A. (2000). A strategic planning approach to Web site management. The Electronic Library, 18(2), 97-108. DTI.(2002). The UK electronics industry ecommerce initiative: A study of the adoption of e-commerce. DTI (Department of Trade and Industry). Retrieved from http://www.intellectuk. org/publications/reports/ DTI.(2003). Business in the information age: International benchmarking study 2003. DTI (Department of Trade and Industry). Retrieved from http://www.ukonlineforbusiness.gov.uk/ benchmarking2003/ Elsammani, Z., Hackney, R., & Scown, P. (2004). SMEs adoption and implementation process of Web sites in the presence of change agents. In N. Al-Qirim (Ed.), Electronic business in small to

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medium-sized enterprises: Frameworks, issues and implications (pp. 149-166). Elsammani, Z., & Scown, P. (2000, March/April). How SMEs perceive and develop their Web presence. Journal of New Product Development and Innovation Management, 71-86. Fillis, I., Johansson, U., & Wagner, B. (2003). A conceptualisation of the opportunities and barriers to e-business development in the smaller ¿UPJournal of Small Business and Enterprise Development, 10(3), 336-344. Fillis, I., Johansson, U., & Wagner, B. (2004). Factors impacting on e-business adoption and GHYHORSPHQW LQ WKH VPDOOHU ¿UP Journal of Entrepreneurial Behaviour & Research, 10(3), 178-191. Grant, S. (1999, November 1-3). E-commerce for small businesses. Proceedings of 2n d International Conference IEC’99 (Innovation Through Electronic Commerce), Manchester (pp. 65-72). Gide, E., & Soliman, F. (1999, November 1-3). A Framework for E-Commerce implementation in Business Operations. In Proceedings of 2n d International Conference IEC’99 (Innovation through Electronic Commerce), Manchester (pp. 58-64). Gray, C., & Lawless, N. (2002). Determinants of HFRPPHUFHDGRSWLRQLQVPDOO¿UPV25t h ISBA National Small Firms Policy & Research Conference: Competing Perspectives of Small Business and Entrepreneurship, University of Briton. Jansen, A. (1998). Technology diffusion and adopWLRQLQVPDOOUXUDO¿UPV,Q7-/DUVHQ ( McGuire (Eds.), Information systems innovation and diffusion: issues and directions (pp. 345-372). Hershey, PA: Idea Group Publishing. Jones, C., Hecker, R., & Holland, P. (2003). Small ¿UP,QWHUQHWDGRSWLRQ2SSRUWXQLWLHVIRUJRQHD journey not begun. Journal of Small Business and Enterprise Development, 10(3), 287-297.

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King, N. (1998). Template analysis. In G. Symon & C. Cassell (Eds.), Qualitative methods and analysis in organisational research: A practical guide. London: Sage Publications. Lindlof, T. R. (1995). Qualitative communication research methods. Thousand Oaks, CA: Sage. McNaughton, R. B. (2001). A typology of Web site objectives in high technology business markets. Marketing Intelligence, 19(2), 82-87. Murphey, P. R., Poist, R. F., Lynagh, P. M., & Grazer, W. F. (2003). An analysis of select Web site practices among supply chain participants. Industrial and Marketing Management, 32(3), 243-250. O’Regan, N., & Ghobadian, A. (2004). Testing the homogeneity of SMEs: The impact of size on managerial and organisational processes. European Business Review, 16(1), 64-77. Palvia, P. C., & Palvia, S. C. (1999). An examination of the IT satisfaction of small-business users. Information & Management, 35, 127-137. Poon, S., & Swatman, P. M. C. (1997). Small business use of the Internet: Findings from Australian case studies. International Marketing Review, 14(5), 385-402. Olson, J. R., & Boyer, K. K. (2003). Factors affecting the utilization of Internet purchasing in small organisations. Journal of Operations Management, 21(2), 225-245. Quayle, M. (2002). E-commerce: The challenge IRU8.60(VLQWKHWZHQW\¿UVWFHQWXU\International Journal of Operations, 22(10), 1148-1161. Rahul De’, & Mathew, B. (1999). Issues in the management of Web technologies: A conceptual framework. International Journal of Information Management, 19, 427-447. Riemenschneider, C. K., Harrison, D. A., & Mykytyn, P. (2003). Understanding IT adoption decision

SMEs ECT Reality

in small business: Integrating current theories. Information & Management, 40, 269-285. Rogers, E. M. (1995). Diffusion of innovations. New York: Free Press. Sparrow, J. (2001). A knowledge-based view of support for business management of e-business activities. 24t h National Firms Policy and Research Conference, Leicester. Taylor, M. J., England, D., & Gresty, D. (2001). Knowledge for Web site development. Internet Research: Electronic Networking Applications and Policy, 11(5), 451-461.

Wen, H. J., Chen, H. G., & Hwang, H. G. (2001). E-commerce Web site design: Strategies and models. Information Management, 9(1), 5-12. Willcocks, L., & Sauer, C. (2000) Moving to e-business. London: Random House Business Book. Windrum, P., & De Berranger, P. (2003). The adoption of e-business technology by SMEs. In O. Jones & F. Tilley (Eds.), Competitive advantage in SMEs: Organising for innovation and change. John Wiley & Sons.

Taylor, M. J., McWilliam, J., Forsyth, H. & Wade, S. (2002). Methodologies and Web site development: A survey of practice. Information and Software Technology, 44(6), 381-391.

This work was previously published in SMEs ECT Reality: From Ad-Hoc Implementation to Strategic Planning, edited by N. Al Qirim, pp. 63-87, copyright 2006 by IGI Publishing (an imprint of IGI Global).

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Chapter 2.8

BSC-Based Framework for E-Business Strategy Fen Wang University of Maryland, Baltimore County, USA Guisseppi Forgionne University of Maryland, Baltimore County, USA

INTRODUCTION E-business is far more about strategy than technology (Raisinghani & Schkade, 2001). An effective e-business strategy is concerned with e-business multidimensional characteristics associated with different levels, parties, elements, and growth pattern features (Bakry & Bakry, 2001). In the process, the strategy must incorporate the effects of the instant and global Internet communication mechanism on the company’s business management architecture. The global reach and interconnectivity of the Internet have spawned new models of e-business strategy and radically transformed existing ones (Pant & Ravichandran, 2001). Indeed, what distinguishes many of the dot-coms is not their new technical power, but the radical new business models (Hamel, 2000). Aided by such innovative e-business models, managers will be able to identify the major decision factors involved in their business strategies

and generate strategies that would improve their RYHUDOO SHUIRUPDQFH DQG SUR¿WDELOLW\ ,Q WKH current context, four essential perspectives are LGHQWL¿HG WR EH DVVRFLDWHG ZLWK DQ HEXVLQHVV VWUDWHJ\¿QDQFLDOFXVWRPHULQWHUQDOSURFHVVHV and learning and growth. These four perspectives ZHUH¿UVWLQWURGXFHGLQHDUO\VDVWKHbalanced scorecard concept (BSC) (Kaplan & Norton, 1992). Because the BSC methodology explicitly focuses on links among business decisions and outcomes, it is intended to guide strategy development, implementation, and provide reliable feedback for management control and performance evaluation. This BSC rationale is thereby appealing to managers who face new challenges in the current turbulent e-business climate. The real challenge is to determine how the BSC can be successfully applied in the context of e-business’s constantly changing environment of interdependencies (Hasan & Tibbits, 2000). E-business introduces new business objectives

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BSC-Based Framework for E-Business Strategy

and strategies and the old measures of success may no longer apply. It is anticipated that the departure from the original BSC for a strategic ebusiness management framework would be more radical than the existing BSC adaptations (e.g., Martinson’s balanced IS scorecard; Martinsons, Davison, & Tse, 1999).

BACKGROUND Few, if any, precise and complete e-business strategy models are available from the literature (Dubosson-Torbay, Osterwalder, & Pigneur, 2001). There are a few theoretical academic studies with some empirical evidence on e-business models success (Horsti, Tuunainen, & Tolonen, 2005). Generally, these e-business model studies fall into two categories: subsystem research and generic frameworks. Examples of the subsystem research include modeling for price structures (Liu, Wynter, & Xia, 2003), customer needs (Olsson & Karlsson, 2003), process synchronization (Park, 2002), and knowledge sharing (Koh & Kim, 2004). Since these subsystem models deal with a particular aspect of e-business, they do not offer a global and complete view of e-business strategy. There are several generic frameworks for the development and analysis of e-business models. Whelan and Maxelon (2001) proposed that an ebusiness architecture requires product, channel, customer management, resource management, and information elements. Afuah and Tucci (2001) presented a more detailed list of components including scope, customer value, revenue sources, connected activities, and so forth, but like Whelan and Maxelon, they did not specify the interreODWLRQVKLSV+DPHO VSHFL¿HGDFRPSOHWH four-part framework with bridge components that is geared toward guiding strategic choices of management. Similarly, Dubosson-Torbay et al. (2001) used a framework with four principal components to analyze e-business: product in-

novation, customer relationship, infrastructure PDQDJHPHQWDQG¿QDQFLDODVSHFWV*RLQJEH\RQG the segment frameworks, De, Mathee, and Abraham (2001) developed a pragmatic framework that offers different perspectives for the analysis of e-business including transaction costs, switching costs, infrastructure investment, and revenue models and so on. For the most part, the generic models offer theoretical, not analytical, decision guidance for practitioners. One exception is the BSC-based ebusiness framework, with preliminary empirical evidence, proposed by Hasan and Tibbits (2000). Their empirical evidence, which was gathered from a case study in an Australian state-government utility, gave four high-level perspectives EXWQRVSHFL¿FDQGH[SOLFLWPHDVXUHVZLWKHDFK perspective. Currently, there is no comprehensive and concrete investigation that applies the traditional BSC to e-business strategy.

EBBSC FRAMEWORK SPECIFICATION Considering a wide range of factors and relationships in this fast-changing e-era, we adapt the original BSC methodology into a comprehensive e-business strategy framework (EBBSC) consisting of four updated perspectives: business model, analytical e-CRM, process structure, and e-knowledge network (see Figure 1). The EBBSC framework links business strategies to a broad range of innovations and measures, examines important business issues facing ebusiness managers, and provides a complete view of e-business strategies. The framework can be better understood by examining the components in detail.

Business Model Perspective Although e-business models differ from the traditional brick and mortar models in various ways,

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BSC-Based Framework for E-Business Strategy

Figure 1. Adapted four perspectives of e-business strategy Business Model

-CRM -customer

Process Structure

E-business Strategy

Process intelligence & -business

e-Knowledge Network

the fundamental needs of consumers and businesses remain much the same. Consumers want the best deal by price and service comparison, while businesses want to grow sales by targeting the right e-shoppers. On the other hand, traditional rear-view and static planning and budgeting cycles don’t measure up to the dynamic, competitive, and compressed business cycles in the global e-era. E-business managers need to focus on a IXWXUHRULHQWHGSUR¿WPD[LPL]DWLRQVWUDWHJ\WKDW will support on-the-spot decision making at the turning points. •

•

442

3UR¿W0D[LPL]DWLRQ3UR¿WLVHTXDOWRWKH difference between the revenue and cost. Many intangible and tangible factors may DIIHFW SUR¿W E\ LQÀXHQFLQJ UHYHQXH DQG cost directly or indirectly, creating risk or uncertainty in achieving the company’s SUR¿WDELOLW\3DOPHU :LVHPDQ  Revenue Increase: Revenue increase refers to expanding and re-pricing product and service offerings to achieve a higher value added mix. According to economics theory, revenue equals the product of the purchases and price. Purchases equal the minimum of the product quantity offered (quantity supplied) and quantity customers are willing and able to purchase (quantity demanded).

•

•

Quantity demanded is treated as a function of the customer retention, marketing mix, and competition. Customer retention measures the company’s customer stickiness or loyalty. The marketing mix includes the company’s major marketing decisions. Competition represents the rivalry between the company and other businesses in the target market. Determinants of the quantity supplied include price, capacity, supply chain PDQDJHPHQWHI¿FDF\DQGVWDIISUR¿FLHQF\ E-business capacity measures not only the limit imposed by the equipment and/or available personnel, but also the limit associated with the network technology. Supply chain PDQDJHPHQWHI¿FDF\UHIHUVWRWKHHIIRUWRI the company in managing relationships with its suppliers. Cost Reduction: The Internet age enables businesses to reduce unnecessary or redundant buyer–seller costs. Generally, cost is FRPSRVHGRI¿[HGFRVWZKLFKLQDQHEXVLness context can include e-business system development and maintenance expenses, and variable cost, which equals the product of unit cost and quantity supplied. Marketing Mix: Marketing effort helps in identifying market opportunities and generating marketing strategies that support

BSC-Based Framework for E-Business Strategy

•

attainment of e-business objectives. The major factors involved in the marketing mix include people, promotion, price, product, presentation, and distribution effort. The RULJLQDO³3ODFH´IDFWRULVGHFRPSRVHGLQWR presentation and distribution effort to represent e-market reality. Presentation refers to the effort involved in online product presentation and distribution. Distribution effort facilitates the connection of the product with the target customer. Sales Cycle Shortened: The sales cycle consists of the time that elapses between the customer interest and the purchase decision. In e-business, a shorter sales cycle enables management to respond promptly to emerging opportunities or threats. The major factors that impact the sales cycle LQFOXGHWKHFXVWRPHUSUR¿OHSURGXFWSULFH promotion, and presentation. A customer SUR¿OHLVDFRPSRVLWHYDULDEOHWKDWUHÀHFWV the customers’ demographic characteristics, preferences and behavior patterns. Generally, the more positive the customer SUR¿OHLQGH[WKHORZHUWKHSURGXFWSULFH the higher the product quality, the better promotion methods and efforts, and the more preferable presentation formats, the shorter the sales cycle would be. Figure 2 summarizes the business model perspective in the framework.

Analytic E-CRM Perspective The Internet enables customers to conveniently shop online, have a broader selection, get competitive pricing and greater access to critical business information (Chen et al., 2004). Online retailing, however, is impeded by security and privacy concerns, downloading time and other technology barriers (Chen, Gillenson, & Sherrell, 2004). Furthermore, customers can switch to other competitive URLs in seconds with minimal ¿QDQFLDOFRVWZKLFKPDNHVVXFFHVVIXOFXVWRPHU

Figure 2. Business model perspective for e-business strategy

management vital in e-business. •

•

New Customer Acquisition: Customer acquisition depends on precise and timely targeting that delivers valuable offers to prospects. The factors involved in customer acquisition include the company’s marketing mix, HVHUYLFHTXDOLW\WKHFXVWRPHUSUR¿OH and competition. Competition represents the company’s external relationship with the supplier, availability of other distribution channels, entry barriers, and product substitutes. When addressing the factor, we have converted the original customer perspective from an external view (Kaplan & Norton, 1992) into a relationships perspective (Hasan & Tibbits, 2000). Customer Satisfaction: 6DWLVIDFWLRQLVLQÀXenced by lead time, product quality, service quality and competitive pricing (Kaplan & Norton, 1992). Lead time measures the time required for the company to meet its customers’ needs, sometimes referred to as ³RUGHUWRGHOLYHU\ F\FOH WLPH´ $ SURGXFW with high quality and customization level and relatively lower price may increase the degree of the customers’ satisfaction. Eservice quality represents the level of the service offered in e-business.

443

BSC-Based Framework for E-Business Strategy

•

•

Customer Retention: 6DWLV¿HGFXVWRPHUV are not necessarily loyal customers. Loyal customers, who repeat their purchases, are YDOXDEOHDVVHWVRIWKHEXVLQHVV:HLGHQWL¿HG customer satisfaction, goodwill, customer SUR¿OH FKDQQHO ÀH[LELOLW\ DQG FRPSHWLtion as the major determinants of retention. 6DWLV¿HGFXVWRPHUVDUHPRUHOLNHO\WRUHWXUQ for repeat purchases. Goodwill, the favor or prestige that a business has acquired beyond the mere value of what it sells reÀHFWVWKHFXPXODWLYHFXVWRPHUVDWLVIDFWLRQ (Jennings & Robinson, 1996). Companies need to identify and retain customers based RQ WKHLU SUR¿OH &KDQQHO ÀH[LELOLW\ UHIHUV to the availability of distribution channels besides the Internet. According to Reichheld, Markey, and Hopton (2000), the seamless integration of different channels can prove to be valuable. &XVWRPHU 3UR¿WDELOLW\ Succeeding in customer acquisition, satisfaction and retention does not necessarily ensure the comSDQ\SUR¿WDEOHFXVWRPHUV7KHIRFXVRIWKH business’s customer strategy, then, should EHRQSUR¿WDELOLW\$OWKRXJKWKHSXUFKDVH PDUJLQLVVWUDLJKWIRUZDUGVSHFL¿FFXVWRPHU initiated cost is not that obvious and tends to be hidden in the customer support, marketing and sales functions. Those costs uniquely

Figure 3. E-CRM perspective for e-business strategy

444

traceable to customers include the customer transactional cost, customer service/support cost, packaging delivery and post sales costs. The ratio of the customer purchase margin to the serving cost is revealing when compared on an individual customers basis, or by segment or channel basis (Schoeniger, 2003). Figure 3 summarizes this analytic e-CRM perspective.

Process Structure Perspective With increasingly competitive global markets, HI¿FLHQF\UHPDLQVYLWDOO\LPSRUWDQW(EXVLQHVV SURFHVVHVPXVWEHWLPHO\ÀH[LEOHDQGG\QDPLF A generic value chain is illustrated in Figure 4, which offers an abstract description of the processes within any type of business. To be feasible in e-business, the internal process view should FRQVLGHU WKH ÀH[LELOLW\ DQG LQWHOOLJHQFH RI WKH process structure (Hasan & Tibbits, 2000). This view implies that e-business process perspective affects not only internal business processes but also the whole business structure. •

Shorter Cycle Time: The notion of shorter cycle time can be directly translated into bottom-line revenue for nearly all companies. General cycle time measures the time to plan and stock (inbound), inventory and

BSC-Based Framework for E-Business Strategy

Figure 4. A generic value chain (From Lewis, 2001)

Inbound Logis cs Customer needs Iden ed

•

Ope

ons

Outbound Logis cs

Marke ng & Sales

Customer Service

Procurement, Human resources, Technology, Infrastructure

scheduling (operations), lead time (orderto-delivery time) and invoice a particular product (outbound). Effective process integration and intelligence can optimize this cycle, measurably reducing inventories and matching market desires. Wherever there are manual and sporadic tasks in the cycle, there are chances for overhead costs, delays, and errors, which can all contribute to a longer cycle. Improved E-Service Quality: E-service is the glue that holds the e-business process together. According to Voss (2000), customer service generally involves three levels: • The minimum necessary services, such as site responsiveness, site effectiveQHVV DQG RUGHU IXO¿OOPHQW 1HWZRUN performance and infrastructure can ensure the basic services customers would expect. • Customer-oriented services, which can promote retention and satisfaction, fall into two categories: (a) informational capabilities: help information availability and interactive communication with the service representatives; and (b) transactional capabilities: order customization and tracking, complete support during ordering process and after purchase period. • Value-added services are extra services such as location sensitive selling/billing or online training. Overall, valueadded services provide operational and

•

Customer

administrative synergy among other levels of services. Reduced Overhead: Every dollar saved IURPRYHUKHDGDGGVWRSUR¿W%HLQJDJLOH DQGÀH[LEOHWKHYLUWXDOSURFHVVRIe-business replaces the traditional product inquiry and physical clearinghouse process and provides greater operating advantages that may lead to reduced overhead. Process integration and intelligence reduce the need IRUDZHOOGH¿QHGRUJDQL]DWLRQDOVWUXFWXUH and often whole layers of staff. As a result, e-business initiatives have resulted in a ÀDWWHURUJDQL]DWLRQDOKLHUDUFK\ZKLFKOHDGV WRKLJKHUSURFHVVHI¿FLHQF\YLVLELOLW\DQG transparency. Figure 5 summarizes this process structure perspective.

E-Knowledge Perspective Because success targets keep changing, the company must make continual improvements to survive and succeed in this intensive global competition. Knowledge innovation and management facilitates continuing business readiness in WKH³QHZZRUOG´RIHEXVLQHVV2UJDQL]DWLRQVDUH now creating Internet-based knowledge networks to facilitate improved communication of data, information, and knowledge, while improving coordination, decision making, and planning (Warkentin, Sugumaran, & Bapna, 2001). Figure 6 highlights some of the characteristics of e-knowledge networks.

445

BSC-Based Framework for E-Business Strategy

Figure 5. Process structure perspective for e-business strategy

This enhanced e-knowledge network will lead WRJUHDWHUEDFNRI¿FHHI¿FLHQF\ÀH[LEOHDGDSWDtion to market changes, greater customer intimacy, DQGRWKHURUJDQL]DWLRQDOEHQH¿WV,QRWKHUZRUGV the intangible effect of e-knowledge networking LVUHÀHFWHGWKURXJKWKHWDQJLEOHPHDVXUHVRIWKH other perspectives. There are additional implicaWLRQVRIVWDIISUR¿FLHQF\SURFHVVLQWHJUDWLRQDQG process intelligence. 6WDII3UR¿FLHQF\6SHFL¿FPDQDJHUSUR¿ciency and employee skills are required in the new competitive e-business environment. The e-knowledge network offers a repository where new knowledge is created and collected while existing knowledge

•

•

Figure 6. E-knowledge networks characteristics (Adapted from Warkentin et al., 2001)

e-Knowledge Networks ? ? ? ? ? ? ?

446

Knowledge oriented Extensive sharing Long-term alliance Relies on leading-edge IT such as agents, data miningetc. Central to business model New organizational forms enabled Automated, Intelligent

•

archived in data warehouses is renewed and updated. Management and operational judgment, knowledge, and experiences are shared and managed to facilitate improved communication, coordination, decision making and planning. Also, staff with higher TXDOL¿FDWLRQVFDQZRUNPRUHHI¿FLHQWO\DQG effectively, while training can be utilized to improve their skills and keep them updated with the technology shift. Process Integration: Process integration enables a company to unify every aspect of its back-end infrastructure and increase responsiveness to changes by integrating disparate business processes. E-knowledge innovation and management facilitates the integration process by creating e-knowledge networks that are characterized by automated capture and exchange of rich knowledge to direct the operation of key LQWHUDFWLYHSURFHVVHV7KHÀDWWHQLQJRIWKH organizational hierarchy also contributes to process integration, which leads to higher SURFHVVHI¿FLHQF\YLVLELOLW\DQGWUDQVSDUency. Process Intelligence: Process intelligence facilitates matches between the company’s offering and target customers, competitors, and the current business by automating the decision and action processes and initiating real time analytics of sales and business alert-

BSC-Based Framework for E-Business Strategy

ing (Park & Park, 2003). The e-knowledge network generates and stores immediate knowledge about internal and external processes, customers and markets, strategic partners, and supply chain partners. Effective communication with trading partners across different platforms can help represent, implement and track the external business SURFHVVHV LQ D G\QDPLF DQG ÀH[LEOH ZD\ (Park & Park). Figure 7 summarizes the e-knowledge network perspective.

EBBSC IMPLICATION AND FUTURE TRENDS Figure 8 summarizes the major measures (Square) and the corresponding decision factors (Oval) DQGUHODWLRQVKLSV$UURZ/LQHV LGHQWL¿HGLQWKH proposed EBBSC framework. At the conceptual level, the framework offers e-business managers a big-picture perspective that is critical in generating and evaluating effective e-business strategies. As an illustration, consider an e-business company that seeks to acquire more prospective customers in the next SODQQLQJSHULRG7KHPDQDJHU¿UVWZLOOORFDWHWKH strategic measure of Newcomer Acquisition in the framework and identify the relevant decision

factors. As the EBBSC framework indicates, these IDFWRUVLQFOXGHWKH&XVWRPHU3UR¿OH&RPSHWLWLRQ the Marketing mix, and E-service Quality. Next, the manager can formulate a tentative strategy plan. In this case, the framework suggests that the company needs critical information regarding the prospective customer population and the competitors. Based on the collected information, PDQDJHPHQWPXVWGHFLGHRQDVSHFL¿FPDUNHWing mix and e-service solution. Starting from the market mix or e-service quality, the EBBSC framework suggests the steps to follow to create the mix and quality plan. Having the priority of the strategic objective at each stage, the manager can allocate the available resources more effectively to achieve these objectives. As an innovative and exploratory framework for e-business strategy, the framework offers directions for future endeavors. First, empirical UHVHDUFKLVQHHGHGRQWKHVSHFL¿FDWLRQRIWKHPHDsures, factors, and relationships in each e-business perspective. Such effort will lead to a more precise and explicit model that offers e-business manager FRQFUHWH DQG TXDQWL¿HG VXSSRUW LQ JHQHUDWLQJ strategies. The EBBSC framework also can be DGDSWHGWRQRQSUR¿WHEXVLQHVVDSSOLFDWLRQV7KH conceptual framework is feasible and directive in ERWKSUR¿WGULYHQDQGQRQSUR¿W,QWHUQHWXVLQJ organizations. Different performance measures

Figure 7. E-knowledge network perspective for e-business strategy

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BSC-Based Framework for E-Business Strategy

)LJXUH6LPSOL¿HG(%%6&IUDPHZRUNRYHUYLHZ

Revenue Increase

Price

Sales Cycle Shortened

Shorter Cycle Time

Reduced Overhead

Customer & Market Share Inbound

Newcomer

Process Intelligence

Customer

Process Inte Outbound

Marke

E-service Quality

hierarchy

Product quality

Employee

Employee training

eKnowledge network

ZLOOEHLGHQWL¿HGXQGHUHDFKDGDSWHGHEXVLQHVV perspective, and the corresponding factors and relationships will be updated accordingly.

CONCLUSION In closing, this EBBSC framework for e-business strategy contributes to both theory and practice. From a theoretical standpoint, it explains how the adaptation of BSC offers a methodology to formulate and evaluate e-business strategy. The framework also offers an evaluation model for strategic e-business decision support. In practice, it provides a means of identifying business opportunities and threats, analyzing current business capabilities and resources to address

448

the opportunities and threats, and generating effective e-business strategies that would improve RYHUDOO SHUIRUPDQFH DQG SUR¿WDELOLW\ ,Q DGGLtion, the framework provides a stable reference for companies to understand and manipulate the fundamental changes introduced by e-business initiatives, and it enables e-business managers to plan and allocate resources more effectively and align strategic objectives with performance results.

REFERENCES Afuah, A., & Tucci, C. L. (2001). Internet business models and strategies: Text and cases. Boston: McGraw-Hill.

BSC-Based Framework for E-Business Strategy

Bakry, S. H., & Bakry, F. H. (2001). A strategic view for the development of e-business. International Journal of Network Management, 11(2), 103-112. Chen, L., Gillenson, M. L., & Sherrell, D. L. (2004). Consumer acceptance of virtual stores: A theoretical model and critical success factors for virtual stores. ACM SIGMIS Database, 35(2), 8-31. De, R., Mathew, B., & Abraham, D. M. (2001). Critical constructs for analyzing eBusinesses: Investment, user experience and revenue models. Logistics Information Management, 14(1/2), 137-148. Dubosson-Torbay, M., Osterwalder, A., & Pigneur,

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relevant regarding the research question. In addition, more attention was paid to those categories that occurred frequently in the data. Inductively, we produced an explaining story to the events and forces under which the e-business development project had to work. The organization is facing market changes and changing the organization according to the changing markets. The objectives for the e-business development emerge from these changes and because the change is continuous and it brings all the time new requirements for the e-business system, the REMHFWLYHVDUHTXLWHÀXFWXDWLQJ,QDGGLWLRQWKH history and legacy structures of the organization FDXVHFRQÀLFWVDQGSUREOHPVLQWKHGHYHORSPHQW when combined with the need for change. These ÀXFWXDWLQJ REMHFWLYHV DQG HPHUJLQJ FRQÀLFWV and problems brought certain consequences to the e-business architecture development in the organization. The formation and description of this explaining story can be considered as selective coding (Strauss & Corbin, 1990) and its details in the studied organization are explained in the next three sections. The study has required extensive interpretation and exploration in the studied organization and therefore the main instruments of the research has been the researchers and their ability to interpret events and people’s actions correctly. Robson (2002) lists three threats to validity in this kind of research, reactivity (the interference of the researcher’s presence), researcher bias, and respondent bias, and strategies that reduce these threats. We have used these strategies in the following way: •

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Prolonged involvement: Although this study lasted for one year, the research project altogether lasted for more than two years in the same organization and consisted of several phases and data collection rounds. Triangulation: The study has used data and observer triangulation as presented by

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Denzin (1978). To reduce the bias caused by researchers, we used observer triangulation, because the data collection was done by two researchers. The bias caused by data was minimized using data triangulation, where different sources of data were used. Interviews were the primary data collection method, but we also received many kinds of project and company documents and architecture descriptions. 3HHUGHEULH¿QJDQGVXSSRUWThe research has included regular meetings and discussions with involved research participants from several research institutions. In addition, preliminary results of research phases have been presented and discussed in conferences and workshops (Smolander, 2003; Smolander, Hoikka, Isokallio et al., 2002; Smolander & Päivärinta, 2002a, 2002b; Smolander, Rossi, & Purao, 2002, 2005). Member checking: The interpretation of WKHGDWDKDVEHHQFRQ¿UPHGE\SUHVHQWLQJ the results to company participants in the research project. Audit trail: All interviews have been recorded and transcribed. The notes and memos of the study have been preserved and data coding and analysis results are available through the analysis tool used, ATLAS.ti.

CHANGES AND THEIR EFFECTS IN THE DEVELOPMENT CONTEXT Starting Point: Changing Markets, Changing Organization During the time of the data collection, there was a considerable change going on in the ICT market and the organization under study had undergone a deep change. A few years ago, the strategies emphasized growth and utilization of the possibilities in the stock market. This enforced

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independent business units inside the organization since the growth was easier to handle through independency. Each of the business units built independent e-commerce solutions and customer extranets, which resulted to a fragmentary set of e-commerce solutions to customers with own Internet sites, sales and billing systems, and Webbased customer support. When the beliefs in the possibilities of ICT sector’s continuing growth diminished, the organization had to change its strategies from growth WRSUR¿WDELOLW\DQGIURPVWRFNPDUNHWWRFXVWRPHU orientation. With independent business units, there was no authority in the organization, which would see a customer as a whole. Instead, each business unit kept track of the customers only in the context of its independent business. To produce DXQL¿HGFXVWRPHULQWHUIDFHDSURIRXQGFKDQJHWR the way of building information systems and an integrated e-business solution was needed. This change would also require changes in business practices and organization. The organization should operate in a more integrated fashion and the barriers between independent units should be lowered. The organization began to see technical e-business architecture as an enabler of change. The IS organizations in independent business units were obliged to cooperate and enforce commitment to the integration of information systems. This also emphasized the role of central information management, which had been in a minor role this far. Now, its roles would include the enforcement of information systems integration and enabling WKHXQL¿FDWLRQRIWKHVDOHVFKDQQHOVDQGFXVWRPHU management for the planned e-business solution. At this point, the organization decided to establish a working group of systems architects from various parts of the organization. In the following section, we shall describe the context and the forces under which this group of architects were GHYHORSLQJDQGGHVLJQLQJWKHXQL¿HGHEXVLQHVV architecture.

&RQÀLFWV3UREOHPVDQG9DU\LQJ Purposes The context for e-business architecture development included many issues, which the working group for technical architecture development had to face and be aware of. These included the market changes as described above, historical RUJDQL]DWLRQDOLQHUWLDÀXFWXDWLQJUHTXLUHPHQWV DQGREMHFWLYHVDQGFRQÀLFWVDQGSUREOHPVHPHUJing from the market changes, inertia, and unclear objectives.

Historical Inertia The organization’s history with independent businesses and their diverging functions and objectives had both psychological and technical FRQVHTXHQFHVFDXVLQJVORZSURJUHVVDQGFRQÀLFWV in the integrated e-business development. Each of the business units had legacy systems with incompatible information structures, technical architectures, and operating principles. It was not possible in practice to replace these systems with a uniform solution at once. The historical inertia had effects also on the organization responsible for information management and information systems. Because of the independence, the organization had no clear central information management that could take responsibility of the e-business architecture deYHORSPHQW0DQ\RIWKHFRQÀLFWVDQGSUREOHPV described later arose from this situation.

The Observed Objectives for the E-Business System 7KHÀXFWXDWLQJREMHFWLYHVPHDQLQJVDQGUHTXLUHments for the e-business architecture created DQRWKHU VRXUFH RI FRQÀLFWV DQG SUREOHPV ,Q D large organization with a high degree of independency, the conceptions among different business units and individuals about the purposes of an

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e-business solution vary considerably. Among the LQWHUYLHZHHVZHLGHQWL¿HGDODUJHVHWRIGLIIHUHQW purposes for the e-business system, which were WKHQFODVVL¿HGLQ¿YHGLVWLQFWFODVVHV

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This list of observed purposes for the e-business system looks quite comprehensive and ambitious. Different interviewees emphasized the purposes differently and many saw that the only realistic objective was to implement a single sign-on procedure with a minimal level of customer information integration. The list anyhow VKRZVWKHFRPSOLFDWHGDQGFRQÀLFWLQJQDWXUHRI objectives for the e-business system when it is developed for a large enterprise.

(PHUJLQJ&RQÀLFWVDQG3UREOHPV Changes in markets and organization, the history of the organization, and the complicated objectives for the e-business system put the architecture GHYHORSPHQWJURXSLQDGLI¿FXOWVLWXDWLRQ7KH group and its members were obliged to respond by some means and these responses shaped mitigated the role of deliberate design in the development SURFHVV ,Q RSHQ FRGLQJ ZH LGHQWL¿HG LQ WRWDO FDWHJRULHVRIFRQÀLFWVDQGSUREOHPV7KLVOLVW was further combined to seven main categories, as follows: • • ‡

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Varying requirements and unclear objectives Problems in the cooperation between technical and business people &RQÀLFW DYRLGDQFH DQG SUREOHPV LQ GHFLsion-making

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As described earlier, the purposes of the system were manifold and complicated and the requirements varied according to the business needs in the business units. The architects held this ambiguity of objectives and requirements as the biggest obstacle in the development. Those in the managerial level recognized the problem as well, but explained it as unavoidable in the situation and H[SHFWHGWKDWWKH¿UVWSURWRW\SHVRIWKHV\VWHPZLOO bring more clarity to the objectives. This resembles the chicken-egg problem: architects must know well the objectives to design the architecture, but WKHREMHFWLYHVDUHIXUWKHUFODUL¿HGRQO\DIWHUWKH ¿UVWYHUVLRQRIWKHDUFKLWHFWXUHLVEXLOW There were several mentions about the problems in the cooperation between technical and business people. Architects expected the business managers to explicate clear requirements and objectives for the system and its architecture. However, they considered the task impossible, because they thought that the business managers do not possess enough understanding about the possibilities of current technology. They felt that this leads to unrealistic objectives, which were manifested especially when considering the possibilities of legacy systems integration: people with business background had far more optimistic views than architects. &RQÀLFWDYRLGDQFHDQGSUREOHPVLQGHFLVLRQ making slowed the progress. Again, because of the history of independency, a central authority that could take care of the architectural decisions for the integrated e-business solution was missing. Because nobody took a full responsibility of the

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VLWXDWLRQWKLVOHGWRDYRLGDQFHRIFRQÀLFWVDQG enforced the tendency towards compromises. A frequently occurring phrase among the architects LQFOXGHGWKHWHUP³ORZHVWFRPPRQGHQRPLQDWRU´ which was usually noting to the compromised solution with a single sign-on procedure and a minimal level of customer information integration. The role of the central information management was unclear and it was lacking the routine of large development efforts. The independency of businesses and the minor role of central information management had implications on the working practices. The architectural and development practices of the business units contained considerable differences implying that also common working practices needed to be established for the development process of the e-business system. Even the understanding of the designed architecture and related technical solutions were GLI¿FXOW WR FRPPXQLFDWH DFURVV WKH RUJDQL]Dtion. Since the business units have had their own histories and produced their own legacy systems and information architectures, the interpretations on the situation and objectives diverged. This, combined with changing organization, unclear objectives, and missing common working pracWLFHV FUHDWHG GLI¿FXOWLHV LQ XQGHUVWDQGLQJ DQG transferring architectural knowledge between the participants from different business units. ,WZDVDOVRGLI¿FXOWWRGHWHUPLQHWKHOHYHORI integration between the systems. The ownership of the information becomes an issue even in the most modest single sign-on e-business solution serving the whole organization. The question EHFRPHV³ZKRRZQVWKHFXVWRPHULQIRUPDWLRQ"´ and relates to determining the integration level to the currently independent back-end legacy systems. The more ambitious integration, the more out-of-control the customer information (and possibly other information too) shifts from the business units. In addition to determining the integration level, the actual implementation of integration proved

to be problematic. Since the diverging legacy systems could not be replaced, they all had to be LQWHUIDFHG2IWKHVHYHQFRQÀLFWVDQGSUREOHPV occurring when creating e-business architecture, only the problem of implementing the integration was mainly a technical problem. The others were more related to the change in organization and practices that happen when developing an e-business system in a large organization with independent businesses. In the following, we shall ORRNFORVHURQZKDWFRQVHTXHQFHVWKHVHFRQÀLFWV and problems cause for the architecture design and development process.

CONSEQUENCES: LIMITED DESIGNS AND MINIMAL SOLUTIONS ,QWKHEHJLQQLQJRIWKHSURMHFWDXQL¿HGDUFKLtecture was seen as a panacea for solving the problems of systems integration, streamlining the organization and unifying the customer interface. However, during the project it became clear that the DIRUHPHQWLRQHGFRQÀLFWVDQGSUREOHPVZRXOGKDYH some unfavorable consequences. While it was of paramount importance for the company to be able to streamline its systems and develop a more coherent architecture enabling the creation of an e-business system, the realities of legacy systems and the organization led to situation where it was best to seek satisfying, even minimal, solutions instead of optimal ones. In the early phases of the project architecture was seen as general blueprints or roadmaps, largely drawn from scratch. Soon, however, the technical experts realized that evolutionary prototyping was the only possibility for progress in the architecture development. Because the schedule was tight, the objectives and requirements unclear and changing, and because the business units were rather independent, it was hard to achieve common understanding and commitment. With

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prototyping, it would be possible to clarify objectives and commit stakeholders by showing WKHPYLVLEOHUHVXOWVDQGEHQH¿WV7KLVFRXOGEH VHHQDV³H[WUHPH´DUFKLWHFWXUHGHVLJQ0HULVDOR Rantanen, Tuunanen, & Rossi, 2005). This could however lead to new problems. The technically oriented architects were specially worried that, combined with the quarter-based reporting system in the organization, evolutionary prototyping can easily produce quick-and-dirty and ad hoc solutions. We could classify the interviewees to those with positive attitudes towards prototyping and to those with negative or doubtful attitudes. In general, the project management believed SRVLWLYHO\WKDW³VRPHKRZ´WKHSURWRW\SHVZRXOG WUDQVIRUPWRWKH¿QDOHEXVLQHVVVROXWLRQZKHUHDV technical architects presented more doubts and wanted to have explicit requirements and objective statements before committing to certain architectural solutions. Prototyping and minimal solutions formed a vicious circle that made the development of robust and clear architectures nearly impossible by severely limiting the options available for the architecture developers. Existing legacy systems, the evolutionary approach, varying UHTXLUHPHQWVXQFOHDUREMHFWLYHVGLI¿FXOWLHVLQ creating common understanding, and problems in decision making created a complex situation where textbook methods, description languages, and rational architecture design, as it is conceived in the literature, had no possibilities for immediate success. The degrees of freedom of design became limited. The system and its architecture could not be designed rationally as a whole, but rather one needed to accept the conditions and limitations caused by the factors above and to keep the day to day operations running while the new systems are continuously created through evolution. The situation had also organizational consequences. We found clear hints of low-level networking and formation of shadow organizations as the result of unclear project organization and problems of decision-making and objective

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setting. As the organization and responsibilities change, new and perhaps inexperienced persons FRPHLQWRFUXFLDORI¿FLDOSRVLWLRQVUHODWHGWRWKH e-business development. At the same time, the experienced architects and other key persons continued to stay in contact with each other. 7KLV XQRI¿FLDO VKDGRZ RUJDQL]DWLRQ EDODQFHG the mismatch in skills and experience that might otherwise seriously impede the development. 7KH¿QDOFRQVHTXHQFHIURPDOOWKHDERYHLV that in fact the e-business architecture becomes emergent: it is created gradually through comSURPLVHVFRQVWUDLQWVDQGFRQÀLFWVFI&LERUUD 2000; Hanseth, Monteiro, & Hatling, 1996). The exact objectives and responsibilities will be resolved as the architecture emerges through evolutionary prototyping. Compared to the conventional view on software architecture design (Hofmeister et al., 1999a), most of the claimed EHQH¿WV RI ULJRURXV DUFKLWHFWXUH GHYHORSPHQW VHHPWREHORVW7KHUHLVQR³JUDQGSODQ´VLQFH the work is proceeding in a day-to-day basis and WKHZHOOGH¿QHGUHVSRQVHVDQGLQWHUIDFHVEHWZHHQ systems do not necessarily emerge in a rationally planned way, but rather most duplicate functions are kept and there is agreement only on a few LWHPVWKDWEHFRPHWKH³DUFKLWHFWXUH´

DERIVED REQUIREMENTS FOR E-BUSINESS SYSTEMS DEVELOPMENT METHODOLOGY From the previous observations and explanations, we can derive a set of requirements that an e-business systems development methodology should meet. The grounded theory process resulted in an explanation model (Figure 2), from which a set of methodological requirements can be extracted. Changing markets and organization, historical inertia, and unclear objectives for the development SURGXFHGDFRPSOH[FRPELQDWLRQRIFRQÀLFWVDQG SUREOHPV WKDW EURXJKW YDULRXV GLI¿FXOW FRQVHquences to the e-business development process.

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Figure 2. Deriving the methodology requirements

Changing markets , changing organization

Diverse objectives for e-business systems development Consequences to e business architecture development

Historical inertia

Changing markets , changing organization

We analyzed the complex socio-technical situation and its consequences and reasoned the set of most pertinent methodological requirements. This was done by identifying and coding the methodological requirements in the interview transcripts and further combining them in 13 requirements as described below. According to Lyytinen et al. a design methodology should conform to a set of key requirements (Lyytinen, Smolander, & Tahvanainen, 1989). It must embed several conceptual structures and description languages, and support several levels of abstraction at which the development process takes place. It should also cover the whole spectrum of activities in information systems development (ISD), include a prescribed model of activities to be carried out during the development process, include a model of the organizational form of the development (a set of human roles), and try to reuse existing descriptions and implementations. Tools for drawing, manipulating, and managing the descriptions should also support the methodology, in a balanced manner. We can further elaborate this conception of ISD methodology by distinguishing between three separate contexts in ISD, namely the technical, language, and organization contexts (Lyytinen, 1987). The technical context is concerned with the technical components of the system (like

Requirements for e-business development methods

hardware and software), language context forms the environment for linguistic communication, and the organization context provides the environment for systematic human interactions, including decision-making and operative control. An ISD methodology includes assumptions, models, languages, and tools related to these three contexts. In the following, we shall extract from the case the general requirements for e-business development methodology and classify them according to these FRQWH[WV7KHREMHFWLYHRIWKLVFODVVL¿FDWLRQLVWRLOlustrate the nature and requirements of e-business architecture development in large organizations with several business areas and to highlight the areas with a weak methodical support. Lyytinen commented already in 1987 that most development methodologies have too limited scope and they tend to concentrate on technological issues late in the development lifecycle (Lyytinen, 1987). This limited scope omits most of the institutional and governance issues which seemed to be central for most stakeholders according to this study on architectural practice. One could argue that the organizational context is particularly relevant for e-business area, as most proponents of e-business emphasize the changes it brings about to work processes and organizations (Kalakota & Robinson, 2001).

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The research into e-business architecture development is in a relatively immature stage. Previous literature has largely assumed that it solves technical issues for known problems (Taylor, McWilliam, Forsyth, & Wade, 2002). However, from the previous passages it has become obvious that methods for forming the problem statement and reaching a mutual agreement on what the architecture is in the end of the day are crucial. In this section, we take this as a starting point and observe the issues that rose in the described case starting from the inner, technical context and ending to the general organizational issues. This corresponds to Lyytinen’s idea that the contexts are hierarchically ordered, because languages are presented by material carriers of technology context and language is needed for organized social action (Lyytinen, 1987). We identify e-architecture approaches in these areas and show how they propose solutions to the issues raised in our study. In the following, we shall present the methodological requirements for each context. We also refer to the rows in Table 1 with the notation R1-R13.

Requirements from the Technology Context

development processes. Existing legacy systems will be integrated to the e-business functionality. This requires the selection of an integrative technology and the construction of development processes supporting the implementation of the integration. Because the integration is the basis and characteristic to e-business development, the development methodology should have specialized and usable techniques for describing information systems integration /R2/. The key issue in the development of e-business systems is the keeping of the day-to-day operations running and at the same time implementing the integration between existing legacy systems and the new e-business functionality. This means that the nature of development is in many cases more analogous to a maintenance project than to a JUHHQ¿HOGGHYHORSPHQWSURMHFW&XUUHQWV\VWHPV development methodologies and models of thought are mostly aimed at designing new systems instead of changing existing ones. This problem has been recognized before the advent of e-business, but it becomes more critical in the e-business development. From this we can derive a requirement that the development methodology for e-business systems should support evolutionary approaches to architectures and systems /R3/.

Existing Solutions Observed Requirements The technical requirements of e-business development methods do not differ much from those of methods for traditional transaction-based information systems. E-business system development includes methodical requirements concerning e.g. distribution, error recovery, and networking, but those requirements can be met without DVSHFLDO³HEXVLQHVVVXSSRUW´$VWDQGDUGZD\ to describe such technical solutions is of course required /R1/. Integrated e-business architecture necessitates the integration of information systems in the organization and the rationalization of technology and

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Most research on e-business systems development in general, and e-business architecture in particular, concentrates on this view. Much of the support that UML and RUP or their derivatives provide seems to concentrate on this area. Component aware methodologies, such as the Catalysis extension to UML, seem suitable for e-business. In addition, there are UML 2.0 extensions, such as SysML (Object Management Group, 2006), that provide better support for technical architecture design. Bischler and Segev (Bichler et al., 1998) investigate the possibilities of component oriented approach for e-business. They take a technical viewpoint, and provide a useful

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listing of enabling technologies for e-business. An applicable standard in this area is the SysML extension to UML (Object Management Group, 2006). A work by Rossi & Schwabe (Rossi & Schwabe, 2000) uses patterns and frameworks as building blocks for e-business systems. This kind of approach could be particularly useful for DUHODWLYHO\ZHOOVSHFL¿HGGRPDLQVXFKDVWUDGH processes, which are assumed to be generic in nature. Baskerville & Pries-Heje see a relatively ¿[HGDUFKLWHFWXUHDVDFRPPRQJURXQGRQWRSRI which e-business systems can be built (Baskerville & Pries-Heje, 2001). As mentioned earlier, in the e-business domain there are several layers of components available. The InterNCA architecture in (Lyytinen, Rose, & Welke, 1998) describes some of these and outlines needs for new breed of development methodologies, which would take into the account the particular problems of e-business systems development. Greunz & Stanoevska-Slabeva present an extension of UML, which can be used to realize V\VWHPVRQWRSRI³PHGLDSODWIRUP´DUFKLWHFWXUH (Greunz & Stanoevska-Slabeva, 2002).

Requirements from the Language Context The language context provides a means and an environment for linguistic communication which encompasses the use, nature, content, context and form of signs (Lyytinen, 1987). The methodology requirements coming from the language context deal with the ability of stakeholders to communicate successfully during the e-business architecture development process.

Observed Requirements The chicken-egg problem between objectives and architecture becomes problematic in e-business development. To design a robust technical architecture, one must have clear objectives, and to select realistic objectives, one must understand

the possibilities of the technical architecture. To overcome this problem, it is necessary to have a close cooperation between technical architects and those responsible of the business. This, however, induces a language problem. These groups often do not have a common language. To overcome the language problem, we need architecture description languages that business managers understand /R4/ and business descriptions that are explicit enough for technical people /R5/. The problems of objectives and integration culminate on architecture design because the designs and prototypes related to technical archiWHFWXUHEHFRPHWKH¿UVWFRQFUHWHDUWLIDFWVLQWKH development showing implications of decisions to businesses and to the information management. Before architecture design, the plans and designs KDYHEHHQRQWKH³3RZHU3RLQWSUHVHQWDWLRQ´OHYHO showing ambiguous and general roadmaps and noble objectives. The more concrete the architecture becomes, the more various stakeholders EHFRPH DZDUH RI WKH FRQVHTXHQFHV FRQÀLFWV and problems they will be facing. This leads to two distinct requirements for the development methodology: the methodology should take the development to a very concrete level (both politically and technically) very soon after the project initiation /R6/ and the architecture designs and descriptions (and their implications) should be approachable and intelligible by the various stakeholders participating the process /R7/.

Existing Solutions As a description language, UML and its extensions offer a fairly strong support for engineering in the language context. Yet, there are very few articles describing these issues of having a common language in e-business area, but one could expect that methodologies used in other domains for participative processes and joint application development could be applied here (August, 1991). In this context, architecture serves as a language between the participants in the devel-

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opment process, enabling communication and making the consequences of the implementation concrete to the participants. Using architecture as an enabler of communication between a diverse set of participants (including various levels of management and technical experts) requires informal and expressive approaches, which are SUDFWLFDOO\QRQH[LVWHQWLQWKH¿HOGRIVRIWZDUH architecture research. This kind of conception RI³DUFKLWHFWXUHDVODQJXDJH´FDQEHDVVRFLDWHG with approaches that include rich and informal GHVFULSWLRQ WHFKQLTXHV OLNH ³ULFK SLFWXUHV´ LQ (Wood-Harper, 1985), the wall-charting technique (Saaren-Seppälä, 1988), and genre-based approaches (Päivärinta, Halttunen, & Tyrväinen, 2001).

Requirements from the Organization Context Observed Requirements These problems formed the largest bulk in our study. They included issues such as organizational inertia as well as environmental limitations, characteristics of a given business environment, codes of conduct in business, and regulatory and societal factors. These factors form together the ‘ballpark’ for an organization to act in relationship with its providers and customers. 7KH ¿UVW RUJDQL]DWLRQDO UHTXLUHPHQW FRPHV from the overall conclusion of the case. The transition from heterogeneous e-commerce to integrated e-business is not only technically challenging. It is more a profound change to the organization. In fact, the primary challenge is in the change of the organization, not in the implementation of the technology. Therefore, e-business systems development methodology should support also the description of organizational change /R8/. In this change of organization and implementation of technology, the role of central information management or some kind of central authority in

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the organization is crucial. The central authority VKRXOGWDNHFDUHRIWKHPXOWLWXGHRIFRQÀLFWVRFcurring when aiming at integration and coordinate the creation of objectives for the system. An ebusiness development methodology should enable the creation of a common vision /R9/, which can then be enforced by the central authority. Evolution with modest but growing objectives may be the only way to develop integrated e-business systems. To foster commitment, some LPPHGLDWH EHQH¿WV VKRXOG EH VKRZQ ZLWK WKH prototypes for each stakeholder. However, at the same time, the path to robust architecture should also be secured and enough time and resources must be given to technical architects. This very GLI¿FXOWDQGFRPSOH[WUDGHRIIPXVWEHPDGHLQ every e-business project /R10/. The implementation of e-business integration deals not only with technical issues but also with GLI¿FXOW SROLWLFDO RQHV $Q RUJDQL]DWLRQ VKLIWing to integrated e-business must resolve issues concerning the internal ownership of information related for instance to customers, sales, contracts, and products. The ownership and responsibilities related to information must be decided and described during the development process. The development methodology should include descriptions for organizational responsibilities and ownership of information /R11/. Identifying and agreeing about objectives EHFDPHWKHPRVWGLI¿FXOWSUREOHPLQWKLVFDVH Thus, to become valuable in practice, e-business development methodology should support not only the formation and recording of objectives but also measuring of success related to objectives /R12/. The requirements directed to an e-business deYHORSPHQWRUJDQL]DWLRQDUHTXLWHFRQÀLFWLQJ2Q the other hand, the development requires a strong authority that can control the process through FRQÀLFWVDQGRQWKHRWKHUKDQGWKHIRUPDWLRQ RIXQRI¿FLDODQGVKDGRZRUJDQL]DWLRQSHHUOHYHO networking) should be fostered to allow creative

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solutions and frictionless cooperation between businesses /R13/. This requirement is, however, not a new one when developing organizations.

Existing Solutions From a more managerial and decision oriented view one could look at business- and strategy development methods, which aim at creation of a common understanding and vision of business strategy. This view sees building of architecture as a common vision building effort rather than a system building effort. It could also be argued that e-business architecture building is quite similar to organizational change processes, especially the introduction of enterprise wide information systems, such as ERP. Koontz has argued for this by presenting e-business architecture development model, which is very generic (Koontz, 2000). Organizational issues are largely neglected by the traditional systems development methodologies, but form important context and frame for the implementation of the e-business systems and architectures. The work on organizational change and observation of the power-play could be fruitful if applied to early stages of architecture development. However, they do merely observe the issues than provide solutions. Checkland’s SSM methodology is one of the few general-purpose PHWKRGRORJLHVWKDWLGHQWL¿HVDQGPRGHOVWKH³HVsence” of the organizational idea of the system and then proceeds to actual development of the system (Checkland & Scholes, 1990). It is clear from the observations in this case study that the H[SOLFLWLGHQWL¿FDWLRQDQGIUDPLQJRIWKHSUREOHP to be solved, and then resolving the actual goals of the architecture forms the basis for architecture development. Most studies thus far seem to assume that the development of e-architecture and infrastructure can be guided by the deliberate actions and decisions of management. However, as can be seen here the technological changes often evolve from

designers’ and users’ experience with such technologies and are often unpredictable (Ciborra, 2000).The problem of loosing the original target while developing partial solutions and prototypes (e.g., see R10) could be helped by explicitly recognizing emergent and opportunistic possibilities created on the process.

Summary of Issues The list above shows that most solutions and research this far, has concentrated on the technical level. Unfortunately, most of the problems seem to be non-technical in nature, they are rather more of the linguistic or organizational. E-business cuts across functional borders in organization and is built on a complex infrastructure of ERP and legacy systems and it shares many of the challenges and opportunities of these organizational technologies. Table 2 summarizes these derived requirements for e-business development methodology. The requirements and their rationale are described in the text above. The ‘Type’ column places the requirement to the appropriate context or contexts (T: technology, L: language, O: organizational). 7KHODVWFROXPQLQWKHWDEOH³6XSSRUWLQ583 HPSOR\LQJ80/´ DQDO\]HVKRZXQL¿HGPRGHOing language (Object Management Group, 2005) DQGWKH8QL¿HG3URFHVV5DWLRQDO6RIWZDUH&RUSRUDWLRQ   VXSSRUW WKH HEXVLQHVV VSHFL¿F characteristics of the development process. This is important, because UML and RUP together form the current methodological basis for many software organizations. The column shows that the support is generally poor. The e-business VSHFL¿FUHTXLUHPHQWVDUHQRWPHWE\80/DQG RUP —only the standard technical issues are well covered. This conclusion calls for method development supporting better these e-business VSHFL¿FUHTXLUHPHQWV In the technical context we noted that e-busiQHVV GHYHORSPHQW ZRXOG EHQH¿W IURP PHWKRG

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Table 2. Summary of the requirements for e-business development methodology Requirement

Type

Rationale

Support in RUP employing UML

R1

Technical issues (like distribution, error recovery, and networking) must be described in a standard way.

T

These issues will occur as in all modern systems development

Good; this is what UML and RUP are for

R2

Specialized techniques for describing the information systems integration

T

IS integration is characteristic to e-business development

Poor; no specialized technique for the description of integration in standard UML. Some UML 2.0 extensions are however available.

R3

The development methodology should support evolutionary L/T approaches to architectures and systems.

R4

Architectural description languages that business managers understand

L

R5

Business descriptions that are explicit enough for technical people

L

R6

R7

The methodology should take the development to a very concrete level (both politically T/L/O and technically) soon after the project initiation The architecture designs and descriptions (and their implications) should be approachable L/O and intelligible by the various stakeholders participating the process

R8

Support for the description of organizational change

R9

Support for the description of a O common vision

R10

Both prototyping and careful architecture design needed

O

T

The change and maintenance of existing systems forms a major part of the e-business systems development To enable realistic objective selection, business managers must have some understanding on architecture To understand the objectives, technical people must have understanding on business The more architecture becomes concrete, the more stakeholders become aware of the consequencHVFRQÀLFWVDQGSUREOHPV To enable wide understanding to the consequences of architectural selections (cf. R4). e-business involves deep changes to organization 5HVROYHFRQÀLFWVEXLOG objectives Gain commitment and resolve objectives through prototyping, aim at robust architecture

Moderate; UML and RUP are mainly targeted at the development of new systems

Poor; the descriptions necessitate too much technical skills and knowledge Moderate; no description techniques showing overall aggregate view

Good (technically), none (politically)

Moderate; no relevant description technique besides Use Case diagrams Poor; some thoughts of ³RUJDQL]DWLRQHQJLQHHULQJ´LQ RUP’s Business Architecture Poor; no common language for all stakeholders Moderate; iterative basis in RUP, but its implementation is GLI¿FXOWLQSUDFWLFH

continued on following page

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Table 2.continued Requirement

R11

R12

R13

Methodology should contain descriptions for organizational responsibilities and ownership of information e-business development methodology should support the formation and recording of objectives and measuring of success related to objectives The development process should support organizationally both effective control VWUXFWXUHVDQGÀH[LELOLW\

Type

Rationale

Support in RUP employing UML

L/O

The ownership of information becomes an issue when aiming at e-business integration

Poor; only general thoughts

L/O

Identifying and agreeing Poor; the objectives are about objectives is one of mostly supposed to be given WKHPRVWGLI¿FXOWLVVXHVLQ to the development project e-business development

O

Strong authority is needed Poor; development organizaWRKDQGOHWKHFRQÀLFWVDQG WLRQ³GHVLJQ´LQDJHQHUDO XQRI¿FLDOVWUXFWXUHVIRU level creative solutions

enhancements in IS integration and evolutionary development. However, the language and especially the organization context appeared to have more importance in the development. In the language context, there was an urgent need for more understandable and concrete architecture descriptions that could be used among many groups involved in the process, including techni-

cal and non-technical people. The organization context appeared as the most important target for research and practical methodical improvements. In that context, we could identify a multitude of issues requiring improvements, including better understanding and usable methods for the design and implementation of organization change, organizational vision, organizational

Figure 3. Support and requirements Benefits of UML/RUP

Problems in architecture creation

High

High

Medium

Medium

Low

Low Technical

Language

Organizational

Technical

Language

Organizational

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ownership of information, and organizational responsibilities. )LJXUHVKRZVFRQFLVHO\RXU¿QGLQJV:KHQ creating e-business or enterprise architecture, the major problems to be solved are organizational. This does not align with the support that UML and RUP provides, because they mostly concentrate on solving the problems in the language and technical contexts. It is the task of future research to provide improvements to this, but, as can be seen from Table 2, it might need quite radical extensions or changes to UML and RUP to be able to support effectively the formation of e-business architecture.

CONCLUSION We have described a process where a large ICT company is building architecture for a comprehensive e-business system. From the case, we extracted 13 requirements for methodology supporting integrated e-business systems deYHORSPHQW DQG FODVVL¿HG WKH UHTXLUHPHQWV WR technology, language, and organization contexts. We also compared the requirements to the support that UML and RUP offers and concluded that the HEXVLQHVVVSHFL¿FUHTXLUHPHQWVDUHQRWPHWLQ UML and RUP. Successful e-business development requires alternative approaches that support better organization change, communication between stakeholders, systems integration, objective formation, and evolutionary development. In our study, architecture manifested itself as a catalyst that makes business and organizational FRQÀLFWVDQGSUREOHPVFRQFUHWH:KHQPDNLQJ decisions about architecture, the systems architects had to take into account the organizational situation in the company. At the same time the architecture starts shaping and changing the organization, thus forming a double mangle (e.g., Jones, 1998). The architects also realized that technical rationality is not enough for success in

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this kind of a situation. To succeed in e-business architecture development, one has to be aware of the political and organizational forces that are driving the development and its objectives. E-business architecture development can therefore be characterized as a process of seeking boundaries, ¿QGLQJVXI¿FLHQWFRQVHQVXVDQGLGHQWLI\LQJFRPmonalities across organizational borders. Most previous literature on architectural methods has neglected this and sought to develop description languages for describing the actual architectures for systems with clear problem statements, whereas we claim that it would be more important to seek tools that aid in building common understanding about the system and its architecture DQGWRROVIRUSURFHVVLQJWKHHPHUJLQJFRQÀLFWV 7KXVZHPDLQWDLQWKDWWKH¿HOGRIDUFKLWHFWXUH IRUHEXVLQHVVZRXOGEHQH¿WIURPWRROVWKDWKHOS WR LGHQWLI\ DQG SURFHVV WKH HPHUJLQJ FRQÀLFWV than tools that aid in developing a technically ³SHUIHFW´ DQG RSWLPL]HG VROXWLRQ 7KHVH WRROV could be used in early phases of development to augment UML and RUP based tools. Examples of such tools are group support systems and different participation facilitation systems. Thus we do not call for replacing UML, but rather adding tools that can be used to communicate with nontechnical people about the architecture.

ACKNOWLEDGMENTS We would like to thank the anonymous reviewers of this paper for their valuable instructions and especially the reviewer that gave us the simple idea of Figure 3.

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This work was previously published in Selected Readings on Information Technology and Business Systems Management, edited by I. Lee, pp. 71-93, copyright 2009 by Information Science Reference (an imprint of IGI Global).

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Chapter 2.16

Developing a Global CRM Strategy Michael Shumanov Monash University, Australia Michael Ewing Monash University, Australia

ABSTRACT While the managerial rationale for adopting customer relationship management (CRM) has been fairly well articulated in the literature, research on strategy development is scant. Moreover, reports RI³&50IDLOXUHV´LQWKHSRSXODUEXVLQHVVSUHVV KDYHGRQHOLWWOHWRLQVSLUHFRQ¿GHQFH7RGDWHZKDW little research has been conducted in the area of &50VWUDWHJ\GHYHORSPHQWKDVEHHQFRQ¿QHGWRD single country (often the U.S.). Global CRM stratHJ\GHYHORSPHQWLVVXHVKDYH\HWWREHVSHFL¿FDOO\ addressed, particularly which elements of CRM strategy should be centralised/decentralised. The present study examines the complexities of global &50VWUDWHJ\XVLQJWKHFDVHRIDOHDGLQJ¿QDQFLDO services company. Interviews are conducted in FRXQWULHV*OREDO+HDG2I¿FHDQGH[WHUQDO,7 consultant perspectives are also considered. Our ¿QGLQJVFRQ¿UPWKDWDK\EULGDSSURDFKKDVZLGH practical appeal and that subsidiary orientation

towards centralisation/decentralisation is moderDWHGE\¿UPPDUNHWVL]HDQGVRSKLVWLFDWLRQ

INTRODUCTION Recent advances in information technology (IT) have enhanced the possibilities for collecting customer data and generating information to support marketing decision making. CRM has been heralded by some as being the key to delivering superior business performance by focusing organisational efforts towards becoming more customer-centric and responsive (Davenport, Harris, & Kohli, 2001; Puschman & Rainer, 2001). However, others have cautioned that increasing information may actually increase the complexity of the decision-making process thereby adversely affecting decision-making performance (Van Bruggen, Smidts, & Wierenga, 2001).

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Developing a Global CRM Strategy

Much of the extant academic literature on CRM has focused on identifying antecedents and consequences (e.g., Bull, 2003; Day & Van den Bulte 2002; Kotorov, 2003; Ryals & Knox, 2001). CRM has been variously conceptualised as (1) a process (e.g., Day & Van den Bulte, 2002; Galbreath & Rogers, 1999; Srivastava, Shervani, & Fahey, 1998); (2) a strategy (e.g., Croteau & Li, 2003; Verhoef & Donkers, 2001); (3) a philosophy (e.g., Fairhurst, 2001; Reichheld, 1996); (4) a capability (e.g., Peppers, Rogers, & Dorf, 1999) and (5) a technology (e.g., Shoemaker, 2001). Although there is clearly more to CRM than technology (Day & Van den Bulte, 2002; Reinartz, Krafft, & Hoyer, 2004), it is important to recognise that technology does play a central role in supporting the seamless integration of multiple customer touch points. IT also enables organisations to collect, store, develop, and disseminate knowledge throughout the organisation (Bose 2002; Crosby & Johnson, 2001). Customer knowledge is critical for successful customer relationship management (Crosby & Johnson, 2000; Davenport et al., 2001; Hirschowitz, 2001).

&50'H¿QHG The importance of technology in enabling CRM LV H[HPSOL¿HG E\ WKH DWWHPSWV DW GH¿QLQJ WKH FRQFHSW&50KDVEHHQGH¿QHGDVWKHDOLJQPHQW of business strategies and processes to create customer loyalty and ultimately corporate profitability enabled by technology (Rigby, Reichheld, & Schefter, 2002). In a similar vain, 5\DOV GH¿QHVLWDVWKHOLIHWLPHPDQDJHPHQW of customer relationships using IT. E-CRM is GH¿QHGDVWKHDSSOLFDWLRQRIFXVWRPHUUHODWLRQship management processes utlising IT and relies on technology such as relational databases, data warehouses, data mining, computer telephony integration, Internet, and multi-channel communication platforms in order to get closer to customers (Chen & Chen, 2004; Fjermestad & Romano, 2003). In many respects e-CRM is a

590

WDXWRORJ\LQWKDWZLWKRXW³H´RUWHFKQRORJ\WKHUH would be no CRM. We therefore standardise on the term CRM throughout the paper. As a business philosophy, CRM is inextricably linked to the marketing concept (Kotler, 1967) and PDUNHWRULHQWDWLRQZKLFKVWUHVVHVWKDW¿UPVPXVW organise around, and be responsive to, the needs of customers (Kohli & Jaworski, 1990; Narver & Slater, 1990). From a capability perspective, CRM needs to be able to gather intelligence about current and prospective customers (Campbell, 2003; Crosby & Johnson, 2000; Davenport et al., 2001; Zablah, Bellenger, & Johnston, 2004) and apply that intelligence to shape its subsequent customer interactions. Furthermore, CRM processes need to acknowledge that relationships develop over time, have distinct phases, and are dynamic (Dwyer, Schurr, & Oh, 1987). Adopting this view highlights that CRM processes are best thought of as longitudinal phenomena. The interesting feature IRU¿UPVLVWKDWWKH\VKRXOGLQWHUDFWDQGPDQDJH relationships with customers differently at each stage (Srivastava et al., 1998). Essentially, CRM involves the systematic and proactive management of relationships from initiation to termination across all channels (Reinartz et al., 2004). Another aspect of the relationship continuum is that not all relationships provide equivalent value to the ¿UP&50UHTXLUHV¿UPVWRDOORFDWHUHVRXUFHV to customer segments based on the value of the FXVWRPHUVHJPHQWWRWKH¿UP=DEODKHWDO Zeithaml, Rust, & Lemon, 2001).

CRM Strategy A high degree of CRM process implementation LVFKDUDFWHULVHGDVZKHUH¿UPVDUHDEOHWRDGMXVW their customer interactions based on the lifecycle stages of their customers and their capacity WRLQÀXHQFHRUVKDSHWKHVWDJHVLHH[WHQGLQJ relationships, Reinartz et al., 2004). Standardising CRM processes enables consistent execution to customers across all delivery channels. Successful CRM also requires organisational align-

Developing a Global CRM Strategy

ment (employee reward systems, organisational structure, training procedures) and investments in CRM technology. Interestingly, the level of technological sophistication of CRM technology makes no contribution to economic performance and supports the view that CRM is more than just software (Reinartz et al., 2004). CRM can be conceptualised at three levels: (1) company wide, (2) functional, and (3) customer facing (Buttle, 2004). This study adopts the FRPSDQ\ZLGHGH¿QLWLRQRI&50ZKLFKYLHZV CRM as a core customer-centric business strategy IRFXVHG RQ DFTXLULQJ DQG UHWDLQLQJ SUR¿WDEOH customers (Buttle, 2004). This requires a customer-centric business culture, formal reward and recognition systems that promote employee behaviours that enhance customer satisfaction and the sharing of customer information and its conversion into useful knowledge. Unfortunately, CRM’s potential has, in many instances, failed to be realised. Successful implementation requires the adoption of a customer-centric business strategy and a redesign RIIXQFWLRQDODFWLYLWLHVZRUNÀRZVDQGSURFHVVHV (Galami, 2000; Nelson & Berg, 2000). Some organisations have begun focusing their business strategy around their customers and capturing, sharing, and applying customer knowledge to deliver superior service and customisation (Mitchell, 1998). However, despite the rhetoric, empirical research on CRM strategy development is scarce. In particular, work on the vexing standardisation/ localisation issue is lacking. In this increasingly globalised economy, it is surprising that researchers have overlooked cross-national differences and global CRM strategy issues. To address these gaps, the present study will seek to explore in depth the issues surrounding standardisation versus localisation of CRM strategy development. A case study of a leading ¿QDQFLDO VHUYLFHV FRPSDQ\ LV XVHG WR H[SORUH these issues. The paper reviews the localisation/ centralisation literature, describes the study to

EHXQGHUWDNHQDQGEDVHGRQWKH¿QGLQJVGUDZV a number of conclusions regarding global CRM strategy development and highlights areas worthy of future research.

GLOBAL CRM STRATEGY In an increasingly competitive and complex market environment, multi-national enterprises (MNE’s) are under constant pressure to re-assess the degree of autonomy they grant to their local subsidiaries. While headquarters are likely to have more expertise on strategic matters, local subsidiaries are likely to have more information on operational issues and be more responsive to G\QDPLFVLPSDFWLQJWKHLUVSHFL¿FPDUNHW:LWKLQ DVSHFL¿F01(FRQWH[WFHQWUDOLVDWLRQUHIHUVWR where decision making is vested largely with the global parent company (Cray, 1984). By contrast, GHFHQWUDOLVHGRUJDQLVDWLRQVDUHGH¿QHGDVWKRVH where each subsidiary has a high degree of autonomy in making decisions on processes and products relevant to the needs of the local market (Edwards, Ahmad, & Moss, 2002). There is some empirical evidence to suggest that although subsidiaries of global parent organisations may be given some autonomy in making operating decisions, strategic decision making is invariably controlled by the parent organisation (Bowman, Farley, & Schmittlein, 2000), which can be manifested through IT (Roche, 1996). 0RUHRYHU,7SURYLGHVDQHI¿FLHQWDQGHIIHFWLYH decision support system to transfer information from the local subsidiary into the parent company’s reporting models, increasing the capacity of headquarter management to engage in local company decision making (Clemmons & Simon, 2001; McDonald, 1996). Using a case study approach, Ciborra and Failla (2000) found that IBM failed in its vision for global CRM because of their ¿[DWLRQIRUVWDQGDUGLVDWLRQDQGFHQWUDOLVDWLRQDQG the use of IT to enforce behaviours. Furthermore, they concluded that this variation in CRM adop-

591

Developing a Global CRM Strategy

tion at the country level and unique regulatory UHTXLUHPHQWVPDGHWKHFRQFHSWRI³JOREDO&50´ tenuous at best, although they acknowledge that &50LVD³SRZHUIXOZHDSRQIRUFHQWUDOLVDWLRQ´ (Ciborra & Failla, 2000, p. 122). This desire for greater parent company control is a function of perceived risk. That is, the greater the perceived level of risk, the greater the desire for active decision making (Garnier, 1982). The types of decisions likely to require parent company decision making include capital expenditure; acquisitions and divestments; and funding. A criticism of centralised decision making is that it is expensive and that local subsidiaries are unable to react quickly to changes in local market dynamics (Harris, 1992). There is some empirical evidence to suggest that organisations with decentralised decision making performed better than those organisations characterised as having centralised decision making with respect to marketing (Ozsomer & Prussia, 2000). Moreover, highly centralised organisations make less contribution to their host country in terms of investment, knowledge transfer, and management expertise than their decentralised counterparts (Fina & Rugman, 1996). We have adopted a typology developed by Barlett and Ghoshal (1989) to classify the predisposition of organisations for a globalised/localised orientation. They describe organisations as: global, international, multi-national, and transnational. A global organisation is characterised as driven E\WKHQHHGIRUJOREDOHI¿FLHQF\ZKLOHKDYLQJ structures that are more centralised in their strategic and operational decisions. An international organisation is characterised as transferring and adapting the parent company’s knowledge or expertise to foreign subsidiaries. The parent retains LQÀXHQFHDQGFRQWUROEXWWRDOHVVHUH[WHQWWKDQD classic global structure. A multi-national organisation manages its subsidiaries as though they were components of a portfolio of multi-national entities with headquarters exercising low control and low coordination. Finally, a transnational organisation

592

seeks a balance between global integration and local responsiveness. This type of organisation has structures considered to be both centralised and decentralised simultaneously. Transnational ¿UPVKDYHKLJKHUGHJUHHVRIFRRUGLQDWLRQZLWK low control dispersed throughout the organisaWLRQ8VLQJWKLVW\SRORJ\RXUIRFDO¿UPFDQEH characterised as a global organisation. That is, they employ structures that are more centralised in their strategic and operational decisions, and their products are homogenous throughout the world. Given a centralised structure, most of the decisions are made at headquarter level and imposed on subsidiaries.

Agency Theory We use agency theory (Ross, 1973) as the theoretical foundation for describing the relationship between headquarters and country subsidiaries. Agency theory refers to the basic agency structure of a principal and agent who are engaged in cooperative behaviour, but having differing goals and attitudes to risk (Ross, 1973). In our research, the principal is headquarters and the agent is the subsidiary organisation. Goal differences, risk tolerance differences, and information asymmetry can create problems in agency relations (LVHQKDUGW 7KH¿UVWJHQHUDOSUREOHPLV differences in the goals of principal and agents. Agents may act in their own self-interest at the expense of the principal. Secondly, principals and agents may have different tolerances towards risk. In the context of CRM strategy development, the principal is likely to have a lower risk tolerance than the agent. The third problem, asymmetric information arises when one party has more information than the other, or when one party prefers to keep some information private. There are two types of agent behaviour that FRXOGEHGHWULPHQWDOWRWKHSULQFLSDO7KH¿UVW adverse selection might refer to a subsidiary’s misrepresentation of its ability to undertake/implement CRM. The second moral hazard refers to

Developing a Global CRM Strategy

the fact that the agent may not act as diligently as anticipated in carrying out the will of the principal. However, agency theory proposes that better information management systems can reduce the agency problem and provide the principal with greater control and is consistent with our earlier discussion on global CRM strategy development. Control may take the form of behaviour-based or outcome-based strategies. Both rely on the principal’s ability to evaluate the performance of the agent, either on a behaviour-by-behaviour basis or at the end of the project based on its outcome (Eisenhardt, 1985). From the principal’s perspective, adopting an outcome-based control strategy is likely to be GLI¿FXOWJLYHQWKDWWKHSULQFLSDOZRXOGQHHGWR wait until the long-term outcomes became known. Consequently, a behaviour-based control strategy may be preferred by the principal in CRM strategy development. The degree of knowledge that the principal (headquarters) has about the agent (wholly owned subsidiary) in terms of market FKDUDFWHULVWLFVFXVWRPHUSUR¿OHDQGSURFHVVHV enables headquarters to more effectively monitor and control a subsidiary’s behaviour (Kirsch, 1996). This is likely to mitigate the risk of subsidiaries acting in their own self-interest at the expense of the entire organisation. Agency theory (Ross, 1973) is therefore useful in addressing our research questions: what aspects of CRM strategy should be centralised/localised? and what are some of the complexities of cross-national CRM strategy development? Another fundamental concept is the level of involvement between the principal and agent in implementation. For instance, if the agent is able to customise the CRM implementation WRUHÀHFWWKHLUFRXQWU\¶VUHTXLUHPHQWVWKHQWKH principal has less ability to control the behaviour of local country CRM managers compared to where the local subsidiary is required to implement a standardised CRM solution. However, the control dichotomy needs to be balanced to avoid implementation failure particularly where headquarters does not have an in-depth understanding

of local market conditions. Furthermore, where a standardised implementation is imposed, it is important to consider the level of knowledge and dynamic learning mechanisms that will need to be created in the local subsidiary to address system failures. We also examined the channel coordination literature (i.e., Frazier, 1999; Frazier & Rody, 1991; Hunt & Nevin. 1974), which describes the relationship between buyer and seller involving a distribution channel. However, given that this research seeks to examine the relationship between headquarters and its subsidiaries, agency theory offers a more robust theoretical foundation with respect to CRM strategy development. The channel coordination literature relates more to relationships characterised as involving a distribution channel, rather than describing the parent-subsidiary relationship.

METHOD Data Collection Understanding both substantive and methodological context permits the reader to put the research into context and thus derive deeper meaning from WKH¿QGLQJV-RKQV 'DWDZHUHGHULYHGXVLQJ the case study method and utilising a multi-sample longitudinal research design (Yin, 1994). Case studies enable the development of deep insights into respondent beliefs and assist in theory development (Beverland, 2001). Bonoma (1985), Hirschman (1986), and Deshpande (1983) have all advocated for greater application of qualitative research methods in marketing. In order to avoid cueing subjects into a desired response, respondents were asked fairly general questions on the topic in order to elicit themes (Strauss & Corbin,  6SHFL¿FDOO\WZR³JUDQGWRXU´TXHVWLRQV 0F&UDFNHQ ZHUHDVNHG7KH¿UVWUHODWHGWR issues surrounding local subsidiary decision-making empowerment in relation to CRM strategy.

593

Developing a Global CRM Strategy

Table 1. First round sample characteristics Subsidiary 1. 2.

Person Interviewed

Function

Senior Consultant CRM Project Customer Relations Manager

Strategic Strategic

3.

Marketing Manager

Operational

4. 5. 6. 7. 8. 9. 10.

Leader CRM Customer Service Manager CRM Manager Marketing Manager CRM Director CRM Manager CRM Manager Senior Consultant - XYZ Consulting

Strategic Strategic Operational Operational Strategic Operational Strategic

11.

Strategic

Table 2. Second round sample characteristics

594

Subsidiary 1. 2. 3.

Person Interviewed Marketing Manager CRM Manager Customer Relations Manager

Function Operational Operational Strategic

4. 5. 6. 7. Subsidiary

CRM Manager Marketing Manager Leader CRM CRM & Corporate Sales Manager Person Interviewed

Operational Operational Strategic Operational Function

8.

Manager CRM & Internet Marketing

Operational

9. 10. 11. 12. 13. 14. 15.

Marketing Manager Marketing Manager Marketing Manager CRM Director CRM Programs Manager CRM Manager Manager Prospecting & New Media

Operational Operational Operational Strategic Operational Operational Operational

Developing a Global CRM Strategy

The second, on what CRM processes and systems should be centralisation versus decentralisation. (DFKSDUWLFLSDQWZDVDOVRVHQWDFRS\RIWKH¿QDO transcript for comment. Any comments were noted and the results adjusted accordingly (Johnston, Leach, & Liu, 1999). The research questions were then e-mailed to sample 1 respondents with a statement thanking them for participating in the initial depth interviews and reiterating the purpose of the research. This was broadly described as seeking to gain an understanding of global CRM strategy development complexities with WKHDLPRIVKDULQJWKHHYHQWXDO¿QGLQJVDFURVV the whole group. In order to cross validate the results using a different group of respondents, we e-mailed the same two research questions to a second sample of respondents coupled with a statement describing the research. The objective was to assess the robustness of the initial sample ¿QGLQJVZLWKDVHSDUDWHVDPSOHRIUHVSRQGHQWV (Deshpande, Farley, & Webster, 1993). Two rounds of interviews were conducted with managers having a functional responsibility for CRM in their respective national subsidiary. Whether CRM respondents were responsible for CRM strategy or implementation was dependent on the level of the respondent within the organisation. Invariably, more senior respondents were responsible for strategy formulation. We had a mix of both strategic and operational CRM reVSRQGHQWVVHH7DEOHVDQG 7KH¿UVWVDPSOH consisted of CRM representatives from the following subsidiaries: Australia, Belgium, Germany, Italy, Netherlands, Spain, Switzerland, United Kingdom, and United States. To improve construct validity, interviews were also conducted with the internal strategy department at headquarters and with external consultants assisting in CRM strategy formulation. This provided a strategic level view of the vision for CRM from a Group/ HQ perspective (Deshpande, 1983; Johnston et DO 'HWDLOVRI¿UVWURXQGUHVSRQGHQWVDUH presented in Table 1.

7KH¿UVWURXQGRILQWHUYLHZVZDVFRQGXFWHGE\ one of the authors over the telephone (Holbrook, Green, & Krosnick, 2003) and recorded/transcribed in order to assist in thematic analysis. The transcribed data was then edited and any additional data was integrated to develop a case summary. Details of second-round respondents are presented in Table 2. Australia, Germany, Netherlands, Spain, and Switzerland were represented in both samples, although in this case an alternative respondent, having responsibility for CRM, was interviewed.

FINDINGS In reporting our results, we quote actual statements made by respondents in order to improve the YDOLGLW\RIWKH¿QGLQJVIRUWKHUHDGHU(LVHQKDUGW 1989; Yin, 1994).

Perceived Complexities of Global CRM Strategy Development The general consensus of both samples suggested that they are limited in their ability to make strategic decisions. “[Subsidiaries] get a very strong framework from headquarters.” Most respondents also anticipate that strategic decision-making is unlikely to become more devolved. Some respondents noted a distinction between strategic decision-making in terms of IT and operations: “I must say that the CRM project on the IT side is very much directed by the project group at head RI¿FH2QWKHRWKHUKDQGQRERG\DVNVXVLI&50 processes are in place and actively managed” and “CRM initiatives particularly system related are being governed on a global or regional basis [and the subsidiary] probably does not have an RYHUULGLQJLQÀXHQFHRQLW´ An exception to this is country X, where the different stage of CRM development in that market has meant that “[head RI¿FH@NLQGRIJDYHXVWKHDELOLW\WRRSHUDWHRXWVLGH of their purview.”

595

Developing a Global CRM Strategy

Respondents in both samples noted cultural differences and maturity of markets as contributing to the complexity of global CRM strategy development. For instance, “local cultural GLIIHUHQFHVPDNHLWGLI¿FXOWWRRIIHUVWDQGDUGLVHG CRM tools.” Another respondent noted “no one central system can accommodate all of the differences that exist.” And another: “what works great in one country may not work at all in another country.” Another perceived complexity was the capacity to meet all the different subsidiary requirements. “The number of countries and the differences in market size and maturity creates another layer of complexity.” And “you have WRGHDOZLWKDORWRIPDUNHWVSHFL¿FV²PDUNHW VSHFL¿FEXVLQHVVSURFHVVHVDQGPDUNHWVSHFL¿F system adaptations.” Process concerns were also articulated, “…existing local IT systems and related business processes cause issues when trying to overlay a global IT system.” Interestingly, hardly any respondents considered software-related issues as potential barriers to &50VWUDWHJ\GHYHORSPHQWZKLFKPD\UHÀHFW their view that CRM is more than just software. However, one respondent noted, “ fractured LQIRUPDWLRQÀRZVEHWZHHQKHDGRI¿FHDQGORFDO subsidiaries results in misinformation regarding CRM developments.” And another respondent (in the second sample) raised the issue of cross functionality: “CRM can’t be implemented easily because it is cross functional.” Some respondents also noted that ³FRXQWU\VSHFL¿FOHJLVODWLRQDOVR needs to be considered.”

Standardised Across Markets or Tailored to Local Market Requirements? On the question of whether CRM processes and systems should be centralised, or decentralised, D ³K\EULG´ DSSURDFK KDV SUDFWLFDO PHULW 7KDW is, embracing a centralised CRM IT system ZKLFKFDQWKHQEHFRQ¿JXUHGE\VXEVLGLDULHVWR meet local market requirements. The perceived

596

EHQH¿WVRIWKLVDSSURDFKDUHWKDWLWLVFRVWDQG UHVRXUFH HI¿FLHQW 1HDUO\ DOO DJUHHG WKDW WKHUH were considerable advantages to centralisation. For example, “If you just let every country do what they wanted, it would be chaos. Everybody would come up with unique solutions, there would be double investments and duplication of effort, there would no cooperation and I think the organization would suffer.” And “centralise as much as possible and localise as little as possible.” A small market perspective was that “we feel that some sort of centralisation in one country can YHU\PXFKEHQH¿WVPDOOHUFRXQWULHVGXHWREXGget constraints impeding their ability to develop their own systems.” The general consensus was WKDWGHFHQWUDOLVDWLRQZRXOGEHLQHI¿FLHQWLQWHUPV of resource utilisation, costs, and duplication of effort. On the other hand, they did recognise that complete centralisation would lead to a situation RILQÀH[LELOLW\“If you do everything on a cenWUDOEDVLVRQHVL]H¿WVDOOWKHQ\RXDUHJRLQJWR end up with inertia of the organization—think global act local.” There was some dissension on ZKHWKHU FHQWUDOLVDWLRQ ZDV PRUH FRVW HI¿FLHQW than localisation. “From a high level perspective [centralisation] might be cheaper, but down the road, one country will have a couple of hundred requirements, another country will also have another couple of hundred and the question is whether it is going to be worth it. The money that you and everyone is going to spend for changes will be [the] same as having a local solution.” The answer seems to be somewhere in the middle. “In my opinion, I think it makes sense to develop them centrally and to adapt to local requirements. Each market is different and has different cultures, has different issues and so to develop things centrally makes sense because of development costs. But each market has to adapt them locally.” And, “You may need to develop some tools that are able to have some consistency at its core, but which can then be FRQ¿JXUHG WR PHHW ORFDO QHHGV EHFDXVH LWV LQ the local market where you have got to survive.”

Developing a Global CRM Strategy

And³DFHQWUDOLVHG&50WRROLVFRVWHI¿FLHQWDQG easy to update if you want to further develop the tool. If it is decentralised, then each country may VSHQGDORWRI¿QDQFLDOUHVRXUFHVGRLQJWKDW7KH negative thing is that it doesn’t take into account the local needs of the market.” Another perspective viewed lack of marketVSHFL¿F LQIRUPDWLRQ DV D SRWHQWLDO EDUULHU WR centralisation. “My perspective is that markets know more what they need than the central department. I think the processes are not that different from country to country, but the key integration points are different for each market and are not well understood by headquarters. I think that when you try and bring a group approach to a VSHFL¿FSUREOHPLWVQRWJRLQJWRZRUN´ Another respondent noted the possibility for resistance, “…what I can see, there is high resistance [to a centralised tool] from the markets because they want a lot of customisation which is not allowed and that causes a lot of problems.” Similarly, “I think that CRM processes should be decentralised because of the respective market idiosyncrasies and it is important to set common objectives and standards and pursue them. In my opinion, centralisation is much more expensive [compared to localisation] because of the customisation costs.” One respondent noted that performance measurement also needs to be standardised in order to enable comparability. “Success measurement .3,VQHHGWREHGH¿QHGVRWKDWWKHSHUIRUPDQFH of one market can be objectively compared against another market.” One respondent suggested a set of guiding principles or framework could be utilised to assist in providing some direction, but ultimately subsidiaries would be responsible for decision making given their more intimate understanding of the market. “I think there needs to be a strategic framework which is applicable for all subsidiaries all over the world and you can act within this framework to bring in your own exSHULHQFHEULQJLQ\RXUPDUNHWVSHFL¿FLVVXHV´ Another respondent noted that an alternative to

the centralisation-decentralisation dichotomy is clustering markets based on similar characteristics and then applying a common approach. “It might be a European solution for say all European countries, ‘an Americas solution’ for North and South America and so forth.”

Global Strategy Local subsidiaries are often not empowered to make strategic decisions with respect to CRM. This may be a function of the perceived risk *DUQLHU 7KLV¿QGLQJLVFRQVLVWHQWZLWK Bowman et al. (2000) who found that strategic decision making was controlled by the parent company. There also appears to be some dissension on whether the organisation has achieved a global strategy for CRM. “Is there one [a global strategy]? To my mind we have only managed to derive some more or less binding rules for the subsidiaries, which tell them the ‘do’s’, and ‘don’ts’ in treating their customers. A concise strategy focused on retention and acquisition to my mind does not yet exist.” In summing up, one respondent noted that, “CRM is really about the EXVLQHVV ¿UVW DQG WKH EXVLQHVV SURFHVVHV 7KH system should be designed to support this, not the other way round.” A number of large market respondents noted that there should be a global platform for knowledge management. “We need to capture the key learnings from each market and leverage off these for the next country.” And “lets stay connected and learn from each other.”

Cross-National Differences In comparing differences between countries a clear pattern begins to emerge: two countries are demonstrably more advanced in terms of CRM implementation than the other 18, who are largely VWLOOLQDSDVVLYH³GDWDFROOHFWLRQ´SKDVHQRW\HW using customer data in their marketing strategies to anywhere near its full potential. The two advanced countries, by contrast, are well ahead

597

Developing a Global CRM Strategy

of the curve—using advanced customer analytics for segmentation purposes to proactively manage customer relationships. The other interesting dynamic within this context is the fact that Head 2I¿FHKDVODUJHO\DOORZHGWKHDGYDQFHGFRXQWU\ ³WRJHWRQZLWKLW´DQGJUDQWHGWKHPDKLJKGHJUHH of autonomy. Among the other 18, there is another fairly obvious partition, between more advanced and less advanced. We say obvious because the split is fairly predictable and is driven by country size, stage of economic/social development, and market size. Basically, mature versus developing economies. There also appears to be a feeling that the group strategy favours large markets and the needs of smaller subsidiaries in emerging markets are subordinated. “There needs to be more attention paid to the smaller [market] solution and strengthening central support.” And “ from the point of view of small markets, you might think that decisions are sometimes based on the big market.”

DISCUSSION Most respondents recognised the many advantages of standardisation. They could see the merit in having a universal strategic framework to guide the CRM process. They acknowledged that IT systems should be standardised to avoid resource duplication and any possible re-inventing of the wheel. This was particularly evident in smaller and/or less developed markets. However, a number of problems with standardisation were also acknowledged. These included inability to factor into account cultural differences/idiosyncrasies, FRXQWU\VSHFL¿FOHJLVODWLRQDQGFRPSOH[LWLHVDULVing from the inherently cross-functional nature of CRM. Thus, somewhat predictably, calls for a hybrid approach can de deduced from the data. However, based on the strength of arguments and also drawing on the literature, we conclude that

598

ORFDO DGDSWDWLRQ QHHGV WR EH ZHOO MXVWL¿HG DQG should be viewed more as the exception rather than the norm.

Theory-Building and Managerial Implications 7KLVSDSHUPDNHVDWOHDVWWZRVLJQL¿FDQWFRQWULEXtions to the extant CRM literature. First, given the lack of empirical research in the area, it extends on earlier work on the complexities of global CRM strategy development (Ciborra & Failla, 2000; Massey, Montoya-Weiss, et al. 2001). Findings FRQ¿UPWKDWWKHUHLVDODFNRIFODULW\UHJDUGLQJ what the important antecedents are to global CRM success. The more mature markets in this study seem to have a better developed understanding of the importance of these dimensions and invest resources in enhancing their competencies in these areas. Second, we have shed some light on the perennial standardisation/adaptation question and have provide a preliminary framework of what elements may be amenable to centralisation and which to localisation. For global CRM PDQDJHUV DQG VWUDWHJLVWV WKH ¿QGLQJV VXJJHVW that a centralised approach has merit. Indeed, the majority of CRM functionality could well be centrally located, with the more customer-centric HOHPHQWVGULYHQDWWKHVXEVLGLDU\OHYHO7KHEHQH¿W of this approach is that it improves control and coordination while reducing transaction costs (Clemmons & Simon, 2001).

Limitations and Future Research A number of limitations of this research are noted. First, the non-random selection of respondents introduced an element of judgement into the sampling process. Furthermore, for the majority of subsidiaries, a single informant may not accurately represent the entire view of the organisation. +RZHYHULWZDVIHOWWKDWWKHPDQDJHULGHQWL¿HG as responsible for CRM activities was the most

Developing a Global CRM Strategy

TXDOL¿HGWRUHVSRQGWRLQGHSWKLQWHUYLHZTXHVtions. Another limitation of this study is that it only involves a single organisation in a single industry and therefore the results may not be generalisable to other organisations or industries. The researchers attempted to mitigate the limitations of the sample by utilising two respondent samples (Deshpande et al., 1993). A problem also arises in DWWHPSWLQJWR¿QGDVXLWDEOHVHFRQGLQIRUPDQWLQ small subsidiaries, and some initial respondents may object to having a cross-validation process. )LQDOO\VWULQJHQWXQLYHUVLW\³(WKLFVLQ5HVHDUFK Involving Humans” guidelines prevented us from identifying verbatim quotes with individual respondents because that would compromise respondent anonymity. A number of directions for future research have emerged from this exploratory study. First, a study examining global CRM strategy development across industries would be useful WRWHVWWKHJHQHUDOLVDELOLW\RIWKHVH¿QGLQJV,Q addition, further research is required to examine the relative importance of those global CRM IDFWRUVZHKDYHLGHQWL¿HGDQGWHVWZKHWKHUWKHUH are some other factors which contribute to global CRM complexity, which have been overlooked in the current study. Also further work is required to quantify the cost-benefit of localisation versus centralisation. It is not clear whether the LQÀH[LELOLW\WKDWDFHQWUDOLVHG&50WRROPDQGDWHV FRPSHQVDWHVIRUWKHDQWLFLSDWHGFRVWEHQH¿WV,W may be that the costs of local market customisation HURGHWKHVHFRVWEHQH¿WV$QLQWHUHVWLQJVWUHDPIRU future research would be to attempt to develop a framework that provides organisations with some insights into the required sequencing of CRM activities consistent with stage of implementation in order to build a solid foundation for the development of further CRM capabilities. Finally, from a cross-cultural perspective, the applicability of a stage model to global CRM implementation is worth considering.

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This work was previously published in the International Journal of E-Business Research, edited by I. Lee, Volume 3, Issue 2, pp. 70-82, copyright 2007 by IGI Publishing (an imprint of IGI Global).

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Chapter 2.17

Understanding the Development of Free E-Commerce/E-Business Software: A Resource-Based View1 Walt Scacchi University of California, Irvine, USA

ABSTRACT This study examines the development of open source software supporting e-commerce (EC) or e-business (EB) capabilities. This entails a case study within a virtual organization engaged in an organizational initiative to develop, deploy, and support free/open source software systems for EC or EB services, like those supporting enterprise resource planning. The objective of this study is to identify and characterize the resource-based software product development capabilities that lie at the center of the initiative, rather than the software itself, or the effectiveness of its operation in a business enterprise. By learning what these resources are, and how they are arrayed into product development capabilities, we can provide the knowledge needed to understand what

resources are required to realize the potential of free EC and EB software applications. In addition, the resource-based view draws attention to those resources and capabilities that provide potential competitive advantages and disadvantages to the organization in focus.

INTRODUCTION AND BACKGROUND Many companies face a problem in determining how to best adopt and deploy emerging capabilities for e-commerce and e-business services. This study employs a resource-based view of the organizational system involved in developing open source EC/EB software products or application systems. This chapter examines the

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Understanding the Development of Free E-Commerce/E-Business Software

GNUenterprise.org (hereafter GNUe) project as a case study. The analysis and results of the case study focus attention on characterizing an array of social and technical resources the developers must mobilize and bring together in the course of sustaining their free EC/EB software development effort. Free EC/EB results from applying free software development concepts, techniques, and tools (Williams, 2002) to supplant those for open source software supporting EC and EB (cf. Carbone & Stoddard, 2001). This study does not focus on the software functionality, operation, or development status of the GNUe free EC/EB software, since these matters are the focus of the GNUe effort, and such details can be found on that project’s Web site. Similarly, it does not discuss what EC/EB application packages are being developed or their operational status, though the categories of software packages can be seen in Exhibit 1, presented later. Instead, the resource-based view (Acedo et al., 2006; Barney, 2001) that is the analytical lens employed in this chapter helps draw attention to a broader array of resources and institutionalized practices (i.e., resource-based capabilities) (Oliver, 1997) that may better characterize the socio-technical investments that provide a more complete picture of the non-monetized costs associated with the development of free/open source software (FOSS), as well as possible competitive advantages and disadvantages (Hoopes et al., 2003). Such a characterization might then eventually inform other VWXGLHVWKDWVHHNWRLGHQWLI\DQGH[SODLQWKH³WRWDO costs of operations” involved in developing, deploying, and sustaining FOSS, or the commercial services that support these costs.

CASE STUDY: THE DEVELOPMENT OF FREE EC/EB SOFTWARE IN GNUE GNUe is an international virtual organization for software development (Crowston & Scozzi, 2002;

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Noll & Scacchi, 1999) based in the U.S. and Europe that is developing an enterprise resource planning (ERP) system and related EC/EB packages using only free software. One of their overarching goals LVWRSXWIUHHGRPEDFNLQWR³IUHHHQWHUSULVH´DV seen in the overview of GNUe shown in Exhibit 1, which is taken from the project’s Web site. This organization is centered about the GNUenterprise. org Web site/portal that enables remote access and collaboration. Developing the GNUe software occurs through the portal that serves as a global information-sharing workplace and collaborative software development environment. Its paid participants are sponsored by one or more of a dozen or so companies spread across the U.S. and Europe. These companies provide salaried personnel, computing resources, and infrastructure that support this organization. However, many project participants support their participation through other means. In addition, there are also dozens of unpaid volunteers who make occasional contributions to the development, review, deployment, and ongoing support of this organization, and its software products and services. Finally, there are XQWROGQXPEHUVRI³IUHHULGHUV´2OVRQ ZKR simply download, browse, use, evaluate, deploy, or modify the GNUe software with little/no effort to contribute back to the GNUe community. GNUe is a community-oriented project, as are most sustained FOSS development efforts (Scacchi, 2002a; Sharman et al., 2002; West & O’Mahony, 2005). The project started in earnest in 2000 as the result of the merger of two smaller projects both seeking to develop a free software solution for EC/EB applications. More information on the history of the GNUe project can be found on their Web site. The target audience for the GNUe software application packages is envisioned primarily as small to mid-size enterprises (SMEs) that are underserved by the industry leaders in ERP software. These SMEs may be underserved due to the high cost or high prices that can be commanded for commercial ERP system installations. Many

Understanding the Development of Free E-Commerce/E-Business Software

of these target SMEs might also be in smaller or developing countries that lack a major IT industry presence. *18HLVDIUHHVRIWZDUHSURMHFWDI¿OLDWHGZLWK the Free Software Foundation and the European FSF. The ERP and EC/EB software modules and overall system architecture are called the GNUe software. All the GNUe software is protected using the GNU Public License (GPL) (DiBona, Ockman, & Stone, 1999; Pavlicek, 2000; Williams, 2002). This stands in contrast to the open source ERP software from Compiere2, which depends on the use of a commercial Oracle DBMS, or other commercially-based OSS ERP project like OpenMFG.com and Openbravo.com. Thus,

GNUe is best characterized as a free software project (Williams, 2002), rather than simply an open source software project (Feller & Fitzgerald, 2002). But many GNUe participants also accept its recognition as an open source software project, since most OSS and all free software projects employ the GPL to ensure the FOSS nature of their development activities and products. GNUe itself is not in business as a commercial enterprise that seeks to build products and/or offer services. It is not a dot-com business, but is D³GRWRUJ´FRPPXQLW\YHQWXUH7KH³EXVLQHVV model” of GNUe is more of a pre-competitive alOLDQFHRUD³FRRSHUDWLYH´ RIVRIWZDUHGHYHORSHUV and companies that want to both cooperate and

Exhibit 1. Overview of the GNUe and its GNUe software (Source: Retrieved April 2006, from http://www. gnuenterprise.org/)

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Understanding the Development of Free E-Commerce/E-Business Software

participate in the development and evolution of free ERP and EC/EB software modules. As such, it has no direct competitors in the traditional business sense of market share, sales and distribution channels, and revenue streams. GNUe does not represent a direct competitive threat to ERP vendors like SAP, Oracle, or JD Edwards. This will be true until these companies seek to offer low-cost, entry-level ERP or EC/EB service applications for SME customers. However, it does compete for attention, participation, independent consulting engagements, and mindshare from potential FOSS developers/users with companies like Compiere.com, OpenMFG. com, Openbravo.com, and others that seek to develop and deploy OSS for ERP applications and EC/EB service offerings that may incorporate non-free, closed source, proprietary software. In addition, since the development of the GNUe software is open for global public review and corporate assessment, it is possible that the efforts DQG RXWFRPHV RI *18H PLJKW LQÀXHQFH RWKHU companies developing ERP or EC/EB software. For example, other non-free, closed source ERP software vendors may perceive competitive pressure of new system features, lower cost software products, better quality, more rapid maintenance, or modular system architectures (CW360, 2002) arising from the globally visible FOSS development efforts of GNUe. The GNUe virtual organization is informal. There is no lead organization or prime contractor that has brought together the alliance as a network. It is more of an emergent organizational form where participants have in a sense discovered each other, and have brought together their individual competencies and contributions in a way whereby they can be integrated or made to interoperate (Crowston & Scozzi, 2002; Crowston & Howison, 2005). In GNUe, no company or corporate executive has administrative authority or resource control to determine: (a) what work will be done; (b) what the schedule will be; (c) who will be DVVLJQHGWRSHUIRUPVSHFL¿HGWDVNVG ZKHWKHU

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available resources for the project are adequate, YLDEOHRUH[WUDQHRXVRUH ZKRZLOOEH¿UHGRU reassigned for inadequate job performance. As such, there is comparatively little administrative overhead to sustain ongoing software development and community portal support activities. Instead, there is a group of core developers, secondary contributors, and casual volunteers who review and comment on what has been done (cf. Jensen & Scacchi, 2007). The participants come from different small companies or act as individuals that collectively move the GNUe software and the GNUe community forward. Thus, the participants self-organize in a manner more like a meritocracy (Fielding, 1999; Scacchi, 2004), rather than a well-orchestrated community for Web-based commerce or entertainment (Kim, 2000). Certain kinds of software development deFLVLRQV DUH PDGH E\ ³ORJLFDOO\ FHQWUDOL]HG EXW physically distributed” core developers (cf. Noll & Scacchi, 1999). These core developers have earned the trust, sustained their commitment of personal time and effort on the project, have been recognized as technical authorities in the project, and KDYHDFKLHYHGVRPHGHJUHHRI³JHHNIDPH´LQWKH eyes other project participants (cf. Fielding, 1999; Pavlicek, 2000). Like other project participants and FOSS developers, the GNUenterprise core developers are expected to uphold and reiterate the freedom of expression, sharing, and learning that free, open source GNUe software represents or offers. So as core developers of GNUe software, they PXVWUHÀHFWRQKRZWKHLUVRIWZDUHGHYHORSPHQW GHFLVLRQVUHÀHFWHPERG\RURWKHUZLVHUHSURGXFH belief in free, open source software. On the other hand, decisions to contribute gifts of skill, time, effort, and other production resources that give rise to software, online communications, and technical peer reviews, are externalized or decentralized across a virtual organization (Bergquist & Ljundberg, 2001; Crowston & Scozzi, 2002). This decentralization of costs reduces the apparent direct cost and administrative overhead (indirect cost) of OSSD by externalization and

Understanding the Development of Free E-Commerce/E-Business Software

global distribution, while sustaining something of a centralized decision-making authority. Thus, individual, corporate, and collective self-interest are motivated, sustained, and renewed in a manner accountable to the culture and community that is GNUe (cf. Monge et al., 1998). As such, these conditions make this study unique in comparison to previous case studies of EC or EB initiatives, which generally assume the presence of a centralized administrative authority and locus of resource control common in ODUJH¿UPVHJ6FDFFKL %XWLWLVVLPLODU to prior FOSS case studies (e.g., Scacchi, 2002a; German,2003) that focus attention on the array of resources whose value is simultaneously both social and technical (i.e., socio-technical resources). Nonetheless, we still need a better understanding of what resource-based capabilities are brought to bear on the development and deployment of EC/EB and ERP software by GNUe. Subsequently, what follows is a description of key resources being employed throughout GNUe to develop and support the evolution of the GNUe software modules.

ANALYZING THE GNUE CASE This section presents an interpretive analysis of the case study, as is appropriate for the kinds of data and descriptions that have been presented and in related studies (cf. Scacchi, 2001, 2002a; Skok & Legge, 2002). A reasonable question to ask at this point is ZKHWKHU*18HLVDQHI¿FLHQWDQGHIIHFWLYHHQWHUprise, and whether its participants realize gains that outweigh their individual investments. As a FOSS development alliance and virtual enterprise, GNUe is not designed to make money or EHSUR¿WDEOHLQWKHFRQYHQWLRQDOEXVLQHVVVHQVH It is, however, conceived to be able to develop and deploy complex ERP and EC/EB software modules. Companies that provide paid software developers to work on the GNUe software expect

to make money from consulting, custom systems integration and deployment, and ongoing system support. These services generally accompany the installation and deployment of this kind of software. They may also just seek to acquire, use, and deploy open ERP or EC/EB applications for their own internal EB operations. Similarly, they may value the opportunity to collaborate with RWKHU¿UPVRURWKHUKLJKO\FRPSHWHQW(53DQG EC/EB software developers (Crowston & Scozzi, 2002; Jensen & Scacchi, 2007; Monge et al., 1998). Other unpaid contributors and volunteers may also share in these same kinds of values or potential outcomes. Can an enterprise make money from creating a complex ERP and EC/EB software suite that from the start is distributed as free, open source software? Don’t ERP and EC/EB software products whose proprietary closed source alternatives from SAP and others cost upwards of a million dollars or more (Curran & Ladd, 2000; Keller & Tuefel, 1998)? Yes, closed source ERP and EC/EB systems do entail substantial acquisition, implementation, deployment, and support costs. But the purchase price of most ERP software packages and EC/EB service application may only represent 5-10% of the total cost of a sustained deployment in a customer enterprise. Subsequently, PRVWRIWKH¿QDQFLDOFRVWRIDQ(53RU(&(% application deployment is in providing the installation, customization, and maintenance support services. As FOSS in widespread use is subject to continuous improvement, the opportunity to provide ongoing support services to businesses or government agencies that rely on them will continue and grow. Thus, a FOSS project like GNUe can still serve to generate opportunities for support service providers, without the need to generate revenues from sales of their ERP and EC/EB software. Commercial vendors like IBM, RedHat, JBoss (recently acquired by RedHat), and many others offer many kinds of OSS support services to realize their revenue generation goals, so GNUe’s developers have the potential

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to earn a living or make additional money from their FOSS development efforts. What kinds of challenges can make the transition from EC/EB to free EC/EB problematic or motivating, and how might these problems be mitigated via OSSD? Two broad categories of challenges to free EC/EB are apparent: those involving economic conditions such as those already noted, and those denoting structural or resource-based capabilities (Acedo et al., 2006; Barney, 2001; Hoopes et al., 2003; Oliver, 1997). Here the focus is on the later, and thus start with a description of the research methods employed in this study.

Research Methods 7KLVVWXG\RI*18HDULVHVIURPDORQJLWXGLQDO¿HOG study spanning 2002-2006. The study employed grounded theory techniques (Glaser & Strauss, 1967; Strauss & Corbin, 1980) including axial coding and construction of comparative memoranda EDVHGRQ¿HOGGDWDFROOHFWHGWKURXJKIDFHWRIDFH and email-interviews, as well as extensive collection and cross-coding of publicly available project documents and software development artifacts SRVWHGRQWKHSURMHFW¶V:HEVLWH7KHVH¿HOGVWXG\ methods are subsequently closely aligned with those characterized as virtual ethnography (cf. Hakken, 1999; Hine, 2000; Scacchi, 2002a) applied to software development projects (cf. Viller & Sommerville, 2000) operating over the Internet/Web as a distributed virtual enterprise (Noll & Scacchi, 1999). A diverse set of work practices and socio-technical interaction processes emerged from the codings and their comparative analysis. These include how participants in different roles express their beliefs, norms, and values, as well as how they are enacted in shaping what free software development entails (Elliott & Scacchi, 2003). These, in turn, guide technical decisionmaking regarding which tools to employ during development activities, as well as how globally distributed participants act through cooperation

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DQG FRQÀLFW WR FROOHFWLYHO\ IRUP DQG UHIRUP  GNUe as a virtual organization (Elliott & Scacchi, 2005). Finally, these practices also serve as a basis for articulating an occupational community of free software developers within the free software movement (Elliott & Scacchi, 2003, 2006). The study presented here extends and complements those just cited through a reframing of the observed practices through data coding and institutionalized patterns that characterize the socio-technical resources and resource-based capabilities that support free software development work in GNUe. Finally, the analysis employs a variety of representational notations, relational schemes, DQGÀRZGLDJUDPV6FDFFKLHWDO., 2006) to help articulate the results that are described next.

Resources and Capabilities for Developing Free EC/EB Software in GNUe What kinds of resources or business capabilities are needed to help make free EC/EB efforts more likely to succeed? How do these resources differ from those recommended in traditional software engineering projects? Based on what was observed in the GNUe case study, the following (unordered) set of socio-technical resources and capabilities enable the development of (a) free ERP and EC/EB software packages, as well as (b) the community that is sustaining its evolution, GHSOR\PHQWDQGUH¿QHPHQWWKRXJKRWKHUNLQGV of socio-technical processes also play key roles in mobilizing these resources into capabilities supporting work practices, and these are described elsewhere (Elliott & Scacchi, 2003, 2005, 2006; Scacchi, 2005).

Personal Software Development Tools and Networking Support In GNUe, free software developers provide their own personal computer resources (often in their homes) in order to access or participate in the

Understanding the Development of Free E-Commerce/E-Business Software

project. They similarly provide their own access to the Internet, and some even host personal Web sites or information repositories. Furthermore, these free software developers bring their own choice of tools (e.g., source code compliers, diagram editors) and development methods to the GNUe community, though this seems to be common to many FOSS projects. There are few shared computing resources beyond the project’s Web site, though its operation is supported in part by a company that provides a small number of programmers to work on the GNUe software. Nonetheless, the sustained commitment of personal resources helps subsidize the emergence and evolution of the GNUe community, its shared (public) information artifacts, and resulting free software. It also helps create recognizable shares of the free software commons (cf. Benkler, 2006; Lessig, 2005) that are linked (via hardware, software, and the Web) to the community’s information infrastructure.

Beliefs Supporting FOSS Development Why do free software developers contribute their skill, time, and effort to the development of free software and related information resources? Though there are probably many diverse answers to such a question, it seems that one such answer must account for the belief in the freedom to access, study, modify, redistribute, and share the evolving results from a FOSS development project. Without such belief, it seems unlikely that WKHUHFRXOGEH³IUHH´DQG³RSHQVRXUFH´VRIWZDUH development projects (DiBona, Ockman, & Stone, 1999; Pavlicek, 2000; Williams, 2002). However, one important consideration that follows is what the consequences from such belief are, and how these consequences are put into action. In looking across the case study data, in addition to examination of the online GNUe information resources from which they were taken (cf. Elliott & Scacchi, 2003, 2005, 2006), many kinds of actions or choices emerge from the develop-

ment of free software. Primary among them in the GNUe project (and possibly other FOSS projects) are freedom of expression and freedom of choice. Neither of these freedoms is explicitly declared, assured, or protected by free software copyright (the GNU Public License, GPL) or community intellectual property rights, or end-user license agreements.3 However, they are central tenets of free or open source modes of production and culture (Benkler, 2006; Lessig, 2005). In particular, in FOSS projects like GNUenterprise and others, these additional freedoms are expressed in choices for what to develop or work on (e.g., choice of work subject or personal interest over work assignment), how to develop it (choice of method to use instead of a corporate standard), and what tools to employ (choice over which personal tools to employ versus only using what is provided). Consider the following excerpt from an online chat provided by someone (here identi¿HGZLWKWKHSVHXGRQ\P%\URQ& ZKRZDVDQ outsider to the day-to-day development activities in the GNUe project seeking to determine if free (appropriate) or non-free (inappropriate) software tools were being used to create diagrams that help document and explain the how the GNUe software is organized: Hello. Several images on the Website seem to be made with non-free Adobe software. I hope I am wrong; it is quite shocking. Does anybody know more on the subject? We should avoid using non-free software at all cost, am I wrong? Elsewhere, GNUe developers also expressed choices for when to release work products (choice of satisfaction of work quality over schedule), determining what to review and when (modulated by community ownership responsibility), and expressing what can be said to whom with or without reservation (modulated by trust and accountability mechanisms). Shared belief and practice in these freedoms of expression and choice are part of the virtual organizational culture that characterizes a

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community project like GNUe (Elliott & Scacchi, 2003, 2005). Subsequently, putting these beliefs and cultural resources into action continues to build and reproduce socio-technical interactions networks that enable sustained FOSS project community and the free software movement (Elliott & Scacchi, 2006; Scacchi, 2005).

Competently Skilled and Self-Organizing Software Developers Developing complex software modules for ERP applications requires skill and expertise in the domain of EB and EC. Developing these modules in a way that enables an open architecture requires a base of prior experience in constructing open systems. The skilled use of project management tools for tracking and resolving open issues, and also for bug reports contributing to the development of such system architecture. These are among the valuable professional skills that are mobilized, brought, or drawn to FOSS development community projects like GNUe (cf. Crowston & Scozzi, 2002; Crowston & Howison, 2005). These skills are resources that FOSS developers bring to their projects, much like any traditional software development project. FOSS developers organize their work as a virtual organizational form that seems to differ from what is common to in-house, centrallymanaged software development projects, which are commonly assumed in traditional software engineering textbooks (Sommerville, 2004). Within in-house development projects, software application developers and end-users often are juxtaposed in opposition to one another. Danziger (1979) referred to this concentration of software development skills, and the collective ability of an in-house development organization to control or mitigate the terms and conditions of system GHYHORSPHQW DV D ³VNLOO EXUHDXFUDF\´ 6XFK software development skill bureaucracy (though still prevalent today) would seem to be mostly concerned with rule-following and rationalized

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GHFLVLRQPDNLQJSHUKDSVDVJXLGHGE\D³VRIWZDUH development methodology” and its correspondLQJ ³LQWHUDFWLYH GHYHORSPHQW HQYLURQPHQW´ IRU software engineering. In a decentralized virtual organization of a FOSS development community like GNUe, a ³VNLOOPHULWRFUDF\´FI)LHOGLQJ DSSHDUV as an alternative to the skill bureaucracy. In such a meritocracy, there is no proprietary software development methodology or tool suite in use. Similarly, there are few explicit rules about what development tasks should be performed, who should perform, when, why, or how. However, this is not to say there are no rules that serve to govern the project or collective action within it. The rules of governance and control in the GNUe project are informally articulated but readily recognized by project participants. These rules serve to control the rights and privileges that developers share or delegate to one another in areas such as who can commit source code to the project’s shared repository for release and redistribution (cf. Fogel, 1999). Similarly, rules of control are expressed and incorporated into the open source code itself in terms of how, where, and when to access system-managed data via application program interfaces, end-user interfaces, or other features or depictions of overall system architecture. But these rules may and do get changed through ongoing project development and online discourse carried out in the GNUe project’s persistent online chat records. Subsequently, GNUe project participants selforganize around the expertise, reputation, and accomplishments of core developers, secondary contributors, and tertiary reviewers and other volunteers. This, in turn, serves to help them create a logical basis for their collective action in developing the GNUe free software (cf. Olson, 1971). Thus, there is no assumption of a communal or egalitarian authority or utopian spirit. Instead what can be seen is a pragmatic, continuouslynegotiated order that tries to minimize the time and effort expended in mitigating decision-making

Understanding the Development of Free E-Commerce/E-Business Software

FRQÀLFWVZKLOHHQFRXUDJLQJFRRSHUDWLRQWKURXJK reiterated and shared beliefs, values, and norms (Elliott & Scacchi, 2005; Espinosa et al., 2002). In GNUe, participants nearer the core have greater control and discretionary decision-making authority, compared to those further from the core (cf. Lave & Wenger, 1991; Crowston & Howison, 2006). However, realizing such authority comes at the price of higher commitment of personal resources described above. For example, being able to make a decision stick or to convince other community participants as to the viability of a decision, advocacy position, issue, or bug report also requires time, effort, communication, and creation of project content to substantiate such an action. Such articulation can be seen in the daily records of the project’s online chat archive. The authority brought about through such articulation DOVRUHÀHFWVGHYHORSHUH[SHULHQFHDVDQLQWHUHVWHG end-user of the software modules being developed. Thus, developers possessing and exercising such skill may be intrinsically motivated to sustain the evolutionary development of their free open source ERP and EC/EB software modules, so long as they are active participants in the GNUe project community.

Discretionary Time and Effort of Developers $UH)266GHYHORSHUVZRUNLQJIRU³IUHH´RUIRU advancing their career and professional development? Most of the core GNUe software developHUV KDYH ³GD\ MREV´ DV VRIWZDUH GHYHORSHUV RU consultants in companies, but few of these jobs VSHFL¿FDOO\IRFXVRQWKHGHYHORSPHQWRI)266 So developing free software in the GNUe project is supported only in part for some of its core developers. Elsewhere, the survey results of Hars and Ou (2002) and others (Lerner & Tirole, 2000; Hann et al., 2002) suggest there are many personal and professional career-oriented practices for why participants will contribute their own personal XQSDLG WLPHDQGHIIRUWWRWKHVRPHWLPHVGLI¿FXOW

and demanding tasks of software development. What we have found in GNUe appears consistent with the cited observations. These practices that help motivate action include self-determination, SHHUUHFRJQLWLRQFRPPXQLW\LGHQWL¿FDWLRQDQG self-promotion, as well as belief in the inherent value of free software (cf. DiBona, Ockman, & Stone, 1999; Pavlicek, 2000; Williams, 2002). In the practice of self-determination, no one has the administrative authority to tell a project member what to do, when, how, or why. GNUe developers can choose to work on what interests them personally, though their choices are limited to features or functions relevant to the ERP or EC/EB packages (or support libraries) they are developing. GNUe developers, in general, work on what they want, when they want, though the core developers do routinely connect to the project’s chat room as a way to show up for work and to be visible to others.. However, they remain somewhat accountable to the inquiries, reviews, and messages of others in the community, particularly with regard to software modules or functions for which they have declared their responsibility to maintain or manage as a core developer. In the practice of peer recognition, a GNUe developer becomes recognized as an increasingly valued community contributor as a growing number of their contributions make their way into the core software modules (Benkler, 2006; Bergquist & Ljundberg, 2001). In addition, nearly two-thirds of FOSS developers work on 1-10 additional software projects (Hars & Ou, 2002; Madey et al.,  ZKLFKDOVRUHÀHFWDJURZLQJVRFLDOQHWZRUN of alliances across multiple software development projects (cf. Monge et al., 1998; Scacchi, 2005). The project contributors who span multiple free or QRQIUHHVRIWZDUHSURMHFWFRPPXQLWLHVLGHQWL¿HG DV³OLQFKSLQGHYHORSHUV´E\0DGH\HWDO  VHUYHDV³VRFLDOJDWHZD\V´WKDWLQFUHDVHWKH*18H community’s mass (Marwell & Oliver, 1993), as well as affording opportunities for inter-project software composition, bricolage, and interoperation (Jensen & Scacchi, 2005). For example,

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Understanding the Development of Free E-Commerce/E-Business Software

some of the core developers chose to import and integrate a free project reporting system (previously in use in other software projects) to help keep track of outstanding GNUe software bugs, as well as who is working on what. ,QEXLOGLQJFRPPXQLW\LGHQWL¿FDWLRQ*18H project participants build shared domain expertise and identify who is expert in knowing how to do what (cf. Ackerman & Halverson, 2000). Interlinked information on the project’s Web site, project development artifacts, and persistent online chat messages help point to whom the experts and core contributors are within the project’s socio-technical interaction network (Scacchi, 2005). In self-promotion, GNUe project participants communicate and share their experiences, perhaps from other application domains or work situations, about how to accomplish some task, or how to develop and advance through one’s career. Being able to move from the project periphery towards the center or core of the development effort requires not only the time and effort of a contributor, but also the ability to communicate, learn from, and FRQYLQFH RWKHUV DV WR WKH YDOXH RU VLJQL¿FDQFH of the contributions (cf. Jensen & Scacchi, 2007; Lave & Wegner, 1991). This is necessary when a participant’s contribution is being questioned in open project communications, not incorporated RU³FRPPLWWHG´ ZLWKLQDQHZEXLOGYHUVLRQRU rejected by a vote of those already recognized as core developers (cf. Fielding, 1999). The last source of discretionary time and effort observed in GNUe is found in the freedoms and beliefs in FOSSD that are shared, reiterated, and put into observable interactions. If a community participant fails to sustain or reiterate WKH IUHHGRPV DQG EHOLHIV FRGL¿HG LQ WKH *3/ then it is likely the person’s technical choice in the project may be called into question (Elliott & Scacchi, 2003, 2005), or the person will leave the project and community. But understanding how these freedoms and beliefs are put into action points to another class of resources (sentimental

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resources) that must be mobilized and brought to bear in order to both develop FOSS systems and the global communities that surround and empower them. Social values that reinforce and sustain the project community, and technical norms regarding which software development tools and techniques to use (e.g., avoid the use of ³QRQIUHH´VRIWZDUH DUHDPRQJWKHVHQWLPHQWDO resources that are employed when participants VHHNWRLQÀXHQFHWKHFKRLFHVWKDWRWKHUVLQWKH project seek to uphold.

Trust and Social Accountability Mechanisms Developing complex software modules for ERP and EC/EB applications requires trust and accountability among GNUe project participants. Though trust and accountability in a FOSS project may be invisible resources, ongoing software and community development work occur only when these intangible resources and mechanisms for social control are present (cf. Gallivan, 2001; Hertzum, 2002). The intangible resources of trust and accountability in GNUe arise in many forms. They include assuming ownership or responsibility of a community software module, voting on the approval of an individual action or contribution to community software (Fielding, 1999), shared peer reviewing of developer work products (DiBona, Ockman, & Stone, 1999; Benkler, 2006), and by contributing gifts (Bergquist & Ljundberg, 2001) WKDWDUHUHXVDEOHDQGPRGL¿DEOHSXEOLFJRRGV2Osen, 1971; Samuelson, 1954; Lessig, 2005). They also exist through the community’s recognition of a core developer’s status, reputation, and geek fame (Pavlicek, 2000). Without these attributions, GNUe developers may lack the credibility they QHHGWREULQJFRQÀLFWVRYHUKRZEHVWWRSURFHHG to some accommodating resolution. Finally, as the GNUe project has been sustained (though ZLWKWXUQRYHU IRURYHU¿YH\HDUVLQWHUPVRIWKH number of contributing developers, end-users,

Understanding the Development of Free E-Commerce/E-Business Software

and external sponsors, then GNUe’s socio-technical mass (i.e., web of interacting resources) KDVEHFRPHVXI¿FLHQWWRHQVXUHWKDWLQGLYLGXDO developer trust and accountability to the project community are sustained and evolving (Marwell & Oliver, 1993). Thus, the GNUe participants rely on mechanisms and conditions they have created for gentle EXWVXI¿FLHQWVRFLDOFRQWUROWKDWKHOSFRQVWUDLQ the overall complexity of the project. These constraints act in lieu of an explicit administrative authority or project management regime that would schedule, budget, staff, and control the project’s development trajectory with varying degrees of administrative authority and technical competence, as would be found in a traditional software engineering project (cf. Sommerville, 2004).

Free Open Source Software Development Informalisms Software informalisms (Scacchi, 2002a) are the information resources and artifacts that participants use to describe, proscribe, or prescribe what’s happening in a FOSSD project. They are informal narrative resources (or online document genres, cf. Kwansik & Crowston, 2005) that are comparatively easy to use, and immediately familiar to those who want to join the community project. However, the contents they embody require extensive review and comprehension by a developer before core contributions can be made. The most common informalisms used in GNUe include: (1) community communications and messages within project e-mail, (2) threaded message discussion forums or group blogs, (3) project news postings, (4) community digests, and (5) instant messaging or Internet relay chat. They also include (6) scenarios of usage as linked Web pages, (7) how-to guides, (8) to-do lists, (9) FAQs and other itemized lists, and (10) project Wikis, as well as (11) traditional system documentation and (12) external publications. Free software (13)

FRPPXQLW\SURSHUW\OLFHQVHVDOVRKHOSWRGH¿QH what software or related project content are protected resources, so that they can subsequently EHVKDUHGH[DPLQHGPRGL¿HGDQGUHGLVWULEXWHG Finally, (14) open software architecture diagrams, (15) intra-application functionality realized via scripting languages like Perl and PhP, and the ability to either employ (16) plug-in components or (17) integrate software modules from other OSSD efforts, are all resources that are used informally, where or when needed according to the interests or actions of project participants. All of the software informalisms are found or accessed from (18) project related Web sites or portals (see Exhibit 1). These Web environments are where most FOSS software informalisms can EHIRXQGDFFHVVHGVWXGLHGPRGL¿HGDQGUHGLVtributed (Scacchi, 2002a). A Web presence helps make visible the GNUe community’s information infrastructure and the array of information resources that populate it. These include FOSS development community project Web sites (e.g., SourgeForge.net, Savanah.org), community software Web sites (PhP-Nuke.org), as well as (19) embedded project source code Webs (directories), (20) project repositories (CVS) (Fogel, 1999), (21) software bug reports and (22) issue-tracking databases (called DCL in GNUe). Together, these two dozen or so types of software informalisms constitute a substantial yet continually evolving web of informal, semistructured, or processable information resources within GNUe. This web results from the hyperlinking and cross-referencing that interrelate the contents of different informalisms together. Subsequently, these FOSS informalisms are produced, used, consumed, or reused within GNUe. They also serve to act as both a distributed virtual repository of FOSS project assets, as well as the continually adapted distributed knowledge base through which project participants in GNUe evolve what they know about the software systems they develop and use.

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Understanding the Development of Free E-Commerce/E-Business Software

FOSSD Capability Enabling Free, Open ERP, and EC/EB Systems The array of social, technological, and informational resources that enable a FOSS development project like GNUe is substantial. However, they differ in kind and form from the traditional enterprise resources that are provided to support proprietary, closed source software systems. These traditional software engineering resources are money (budget), time (schedule), skilled (salaried) development staff, project managers (administrative authority), quality assurance (QA) and testing groups, documentation writers, computer hardware and network maintainers, and others (cf. Sommerville, 2004). Free software projects like GNUe seem to get by with comparatively small amounts of money, though subsidies of various kinds and sources are present and necessary. They also get by without explicit schedules, though larger projects may announce target release dates, as well as (partially) order which system functions or features will be included in some upcoming versions, for some target releases. Further, they get by without a rule-making and decision-making authority of corporate project managers or enterprise executives, who may or may not be adept at empowering, coaching, or rewarding development staff to achieve corporate software development goals. Instead, in GNUe, participants rely on an implicit but frequently recited regime of beliefs, values, and norms that help organize cooperaWLYH DFWLYLW\ DQG UDWLRQDOL]H FRQÀLFW PLWLJDWLRQ (Elliott & Scacchi, 2003, 2005). The remaining resources are provided within a free software development effort via subsidies, sponsorship, or volunteer effort. Thus, the resources for free software development efforts are different in kind, and in how they are arrayed and brought to bear when compared to a traditional software engineering effort. Free software project resources are not mobilized, allocated, or otherwise brought to bear in the man-

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ner traditional to the development of proprietary, closed source software systems. Hopefully, it should be clear that the differences being highlighted are not based simply on a comparison of functionality or features visible in the development or use of open vs. close source software products. As such, the resource-based capability for developing free software packages for ERP and EC/EB applications is different, though not necessarily more or less costly.

DISCUSSION AND CONCLUSION Many questions about free software development remain unanswered or unexamined by this study. For example, it is unclear whether there must be a critical mass of salaried software developers whose job includes development or support of GNUe software, and if so, how many software developers this entails. Over the four years in the study of GNUe, the number and composition of core software developers has changed, partly in response to their changing interests and work situations. The project has not grown to the point where commercialization of the GNUe software has become an imperative or new venture startup opportunity, as has happened with OSS ERP projects of Compiere, OpenMFG, and Openbravo. Thus, it is unclear whether GNUe will become a viable enterprise capable of hiring a professional or full-time staff, as well as engaging in contracted provision of installation, customization, and support services that normally accompany ERP and EC/EB software packages. Further comparative study of other free software projects and their approach for commercialization are needed. However, it does seem clear that GNUe has managed to sustain itself as a viable ongoing enterprise that continues to develop and sustain free ERP and EC/EB software packages, which its developers use and deploy in their day jobs or consulting practices.

Understanding the Development of Free E-Commerce/E-Business Software

Beyond this, three conclusions can be drawn from the study, data, and analysis presented in this UHSRUW)LUVWWKLVFKDSWHULGHQWL¿HVPDQ\W\SHV of socio-technical resources and resource-based capabilities for free EC/EB that may explain/predict (a) what’s involved, (b) how it works, or (c) what conditions may shape the longer-term success or failure of such efforts. In simple terms, these resources include time, skill, effort, belief, personal and corporate subsidies, and community building on the part of those contributing as developers and users of free EC/EB systems and techniques. Of these, belief in the freedoms that open source system development embraces, including freedom of choice and freedom of expression (Elliott & Scacchi, 2003, 2005, 2006) appears central. Such belief in turn enables and affords the ongoing commitment, development, and articulation of a web of social, technological, and information resources that sustain a free software project, without the traditional administrative and ¿QDQFLDOUHVRXUFHVIRXQGLQWUDGLWLRQDOVRIWZDUH development enterprises. Developers and users who believe in the promise and potential of free ERP or EC/EB packages are willing to allocate (or volunteer) their time and apply their skills to make the effort of developing or using open source systems a viable and successful course of action. Thus, companies seeking to invest in or exploit free EC/EB techniques or systems must account for how it can most effectively cultivate a free software culture, belief system, and community of practice, as part of their strategic choice. 6HFRQG WKLV LV WKH ¿UVW VWXG\ WR HPSOR\ D resource-based view of a FOSS development project. The resource-based view of organizational capability and competitive advantage is the dominant analytical lens employed in studies of organizational strategy and strategic management (cf. Acedo et al., 2006; Barney, 2001). Why should people interested in FOSS development practices be concerned or interested in such a strategic perspective? Many reasons might be cited in support,

but attention here can be drawn to determining whether free software systems and development methods offer sustained or differentiated advantages over traditional software engineering approaches applied to the development of close source, proprietary (non-free) software systems. If there are advantages that can be traced to the resource arrangements found in free software projects like GNUe, then these would be noteworthy ¿QGLQJVDVZHOODVDSRVVLEOHEDVLVIRUIXUWKHU exploration and theorizing. Accordingly, in the GNUe case, resources like personal computing tools that help subsidize the development effort, beliefs that provide a cultural basis for making decisions about technical choices, trust and social accountability, discretionary software development work times, and the preferred use of software informalisms instead of software engineering IRUPDOLVPV OLNH ³UHTXLUHPHQWV VSHFL¿FDWLRQV´ DQG³SURMHFWPDQDJHPHQWSODQV´DOOGLIIHUHQWLDWH the practice of free software development from that advocated in traditional software engineering textbooks (e.g., Sommerville, 2004). Last, this study links free software with ERP and EC/EB. No prior case studies of ERP or EC/ (%V\VWHPVKDYHLGHQWL¿HGRUDGGUHVVHGZKHWKHU or how free software (or open source software) methods might be used to develop or integrate EC/ EB software packages, at least beyond the use of OSS Web servers or Web site content management systems (Carbone & Stoddard, 2001). Thus, there LVDQRSSRUWXQLW\IRU¿UPVWREHJLQFRQVLGHULQJ whether these results merit timely consideration or exploratory investments in free software or OSS. For example, companies offering consumer products or high value, information technologybased products and services may begin to consider whether free EC/EB capabilities that offer lower purchase prices, lower total cost of ownership, and higher quality (Scacchi, 2002b) represent new market entry or new product differentiation RSSRUWXQLWLHV 6LPLODUO\ FRPSDQLHV PD\ ¿QG that free/open source software represents a new,

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Understanding the Development of Free E-Commerce/E-Business Software

highly innovative approach to software product or application system development that marries the best capabilities from both private investment and collective action (von Hippel & von Grogh, 2003; Olson, 1971).

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ENDNOTES

Scacchi, W., Jensen, C., Noll, J., & Elliott, M. (2006). Multi-modal modeling: Analysis and validation of open source software requirements processes. Int. Journal of Information Technology and Web Eng., 1(3), 49-63. Sharman, S., Sugurmaran, V., & Rajagopalan, B. (2002). A framework for creating hybrid-open

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The research described in this report was supported by grants from the U.S. National Science Foundation Industry/University Research Cooperative CRITO Consortium; the National Science Foundation #0083075, #0205679, #0205724, #0350754, and # 0534771; and the Defense Acquisition University by contract N487650-27803. No endorsement implied.

Understanding the Development of Free E-Commerce/E-Business Software

2

Compiere.com is a software product development community that is building an open source software ERP system that requires the use of Oracle. It is not, however, free softZDUHDVLQ³IUHHGRP´VRIWZDUH:LOOLDPV 2002). Compiere.com, however, claims more than 500K copies of its software have been downloaded or installed, making it the most widely deployed ERP system in the world,

3

whether as a proprietary or FOSS-based offering. End-user license agreements (EULAs), associated with probably all software, often VHHNWRGHFODUH³IUHHGRPIURPOLDELOLW\´IURP people who want to use licensed software for intended or unintended purposes. But liability freedom is not the focus here.

This work was previously published in Electronic Commerce: Concepts, Methodologies, Tools, and Applications, edited by A. Becker, copyright 2008 by Information Science Reference (an imprint of IGI Global).

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Chapter 2.18

Balancing Accuracy of Promised Ship Date and IT Costs Young M. Lee IBM T. J. Watson Research Center, USA

ABSTRACT In an ideal e-business environment, when a customer order is scheduled and a ship date is computed, the availability should immediately be reserved and not be available for future orders. However, in reality the availability data that are used for the scheduling the orders are not real time availability (physical availability), but they are availability information stored in an IT system (system availability). The availability data in the IT system (static view of availability) is typically refreshed (synchronized with real time availability) only periodically since it is very expensive to update the database in real time. Due to this potentially inaccurate view of the availability, some orders cannot be shipped on the promised ship date. Therefore, for certain customer orders, products are shipped later than the promised ship date resulting in customer dissatisfaction. ThereIRUH RQH RI NH\ GHFLVLRQV LQ RUGHU IXO¿OOPHQW process is to properly balance IT system (e.g., IT expense) and accuracy of promised ship date. In this work, we study how availability fresh rate

(IT system) impacts customer service level. The simulation model we develop helps making critical business decision on refresh rate of availability, and avoiding expensive IT investment.

INTRODUCTION Being able to promise customers the desirable GHOLYHU\GDWHDQGIXO¿OOLQJWKHRUGHUVDVSURPLVHG are an important aspects of customer services. With the recent surge and widespread use of ecommerce, shoppers can now easily assess and compare customer service quality in addition to quality of goods and price among different vendors. This creates a very competitive business environment, thus making customer service a critical factor for success and survival of many companies. Competitive pressures are forcing companies to constantly look for ways to improve customer services by evaluating and redesigning supply chain processes. Availability Management Process (AMP), also called Available-to-Promise (ATP) process, is a key supply chain process that

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Balancing Accuracy of Promised Ship Date and IT Costs

impacts customer service since it determines customer promised ship (or delivery) dates, the accuracy of the promised ship date, order schedXOLQJGHOD\DQGRUGHUIXO¿OOPHQWUDWHDVZHOODV inventory level. The availability management involves generating availability outlook, scheduling customer orGHUVDJDLQVWWKHDYDLODELOLW\RXWORRNDQGIXO¿OOLQJ the orders. Generation of Availability Outlook is a push-side of the availability management process, and it allocates availability into ATP (Availableto-Promise) quantities based on various product and demand characteristics and planning time periods. Order Scheduling is a pull-side of availability management process, and it matches the customer orders against the Availability Outlook, determines when customer order can be shipped, and communicates the promised ship date to FXVWRPHUV 2UGHU IXO¿OOPHQW LV H[HFXWLQJ WKH shipment of the order at the time of promised ship date. Even if an order is scheduled for shipment for a certain date based on the outlook of availability, the resources that are required to ship the product on the promised ship date may not actually available when the ship date comes. A key role for effective availability management process is to coordinate and balance the push-side and pull-side of ATP, and to have adequate Information System (IS) capability so that desirable and accurate ship date is promised to customer and product is shipped on the promised date. AMP or ATP process has been described in several research papers. Ball, Chen, and Zhao (2004) gave an overview of the push-side (Availability Planning) and pull-side (Availability Promising) of ATP with examples from Toshiba, Dell, and Maxtor Corporation. They stressed the importance of coordinating the push and pullside of availability management for supply chain performance by making good use of available resources. Although ATP functions has been available in several commercial ERP and Supply Chain software such as SAP’s APO, i2’s Rhythm, Oracle’s ATP Server and Manugistics’ SCPO

modules, and so forth for several years (see Ball et al. (2004) for details), those ATP tools are mostly fast search engines for availability database, and they schedule customer orders without any sophisticated quantitative methods. Research on the quantitative side of ATP is still at an early stage, and there are only a limited number of analytic models developed in supporting ATP. For the push-side of ATP, Ervolina and Dietrich (2000) developed an optimization model as the resource allocation tool, and described how the PRGHOLVXVHGIRUDFRPSOH[&RQ¿JXUHGWR2UGHU (CTO) environment of the IBM Server business. They also stress how the push-side (Availability Promising) and pull-side (Availability Planning) have to be work together for the overall availability management performance. For the pull-side of ATP, Chen, Zhao, and Ball (2002) developed a Mixed-Integer Programming (MIP) optimization model for a process where order promising and fulfillment are KDQGOHGLQDSUHGH¿QHGEDWFKLQJLQWHUYDO7KHLU model determines the committed order quantity for customer orders that arrive with requested delivery dates by simultaneously considering material availability, production capacity as well as material compatibility constraints. They also studied how the batching interval affects supply chain performance with different degree of resource availability. Moses, Grand, Gruenwald, and Pulat (2004) also developed a model that computes optimal promised ship date considering QRWRQO\DYDLODELOLW\EXWDOVRRWKHURUGHUVSHFL¿F characteristics and existing commitments to the previous scheduled orders. Pan and Shi (2004) also developed a heuristics-based order promising model but with E-commerce environment in mind. They modeled a process where customer orders arrive via Internet and as earliest possible shipment dates are computed in real-time and is promised to customers. All the previous work described above deal with either push-side of ATP or pull-side of ATP with an assumption that accurate inventory data

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are available in real time. However, in reality the inventory data is less than perfect, and even if the optimal ATP tools were in place, order IXO¿OOPHQWSHUIRUPDQFHZRXOGEHOHVVWKDQRStimal. The optimality can be approached only if there exists information technology (IT) in the availability management process making available accurate inventory data in real time. In this article, we describe an availability management simulation tool that estimates the accuracy of ship date commitment at the presence of imperfect IT environment, which results in inaccurate view of available inventory. Determination of promised ship date is based on availability (inventory) information kept in a computer system (system inventory), which is assumed to be accurate. In actuality, the system inventory and the actual inventory (physical inventory) are synchronized only periodically due to various reasons such as IT costs for the data synchronization, inventory loss, transacWLRQ HUURU DQG LQFRUUHFW SURGXFW LGHQWL¿FDWLRQ The error between the system inventory and the physical inventory could accumulate over time and is not corrected until the refresh of availability (synchronization of inventory), which takes place only periodically (for example, once a day, or a few times a day) since it is expensive to generate new snapshot of availability that are consistent throughout various corporate business systems including ERP (Enterprise Resource Planning) system. In fact, inventory inaccuracy has been LGHQWL¿HGDVDOHDGLQJFDXVHIRURSHUDWLRQDOLQHI¿FLHQF\LQVXSSO\FKDLQPDQDJHPHQW$UHFHQW study (DeHoratius & Raman, 2004) shows that WKHYDOXHRIWKHLQYHQWRU\UHÀHFWHGE\WKHVHLQDFcurate records amounts to 28% of the total value of the on-hand inventory for a leading retailer in the U.S. There have been studies on impact of inventory inaccuracy on supply chain performance, including Iglehard and Morley (1972), Wayman (1995), Krajewski, King, Ritzman, and Wong (1987) and Brown Brown, Inman, and Calloway (2001). More

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recently, Kang and Koh (2002) simulated the effect of inventory shrinkage (thus inaccuracy) in an inventory replenishment system with an (s, S) policy. Kang and Gershwin (2004) and Kök and Shang (2004) developed methods to compensate for the inventory inaccuracy in replenishment. Fleisch and Tellkamp (2005) analyzed the impact of various causes of inventory discrepancy between the physical and the information system inventory on the performance of a retail supply chain based on a simulation model. Our work also studies the impact of inventory inaccuracy, but on accuracy on ship date commitment through a discrete-event simulation modeling approach. Discrete-event simulation has been around for many years in simulating supply chain management (SCM) processes to evaluate its effectiveness. McClelland (1992) used simulation to study the effect of MPS method, variability of demand/supplier response on customer services, order cycle, and inventory. Hieta (1998) analyzed the effect of alternative product structures, alternative inventory and production control methods on inventory and customer service performance. Bagchi, Buckley, Ettl, and Lin (1998) evaluated the design and operation of SCM using simulation and optimization, analyzed SCM issues such as site location, replenishment policies, manufacturing policies, transportation policies, stocking levels, lead time, and customer services. Yee (2002) analyzed the impact of automobile model and option mix on primary supply chain performance such as customer wait time, condition mismatch and part usage. Lee, Cheng, and Leung (2004) simulated the impact of RFID on supply chain performance. However, there has not been any simulation modeling work that analyzes the impact of IT system on the supply chain performance. Development of simulation model for supply chain such as availability management process can be time-consuming. We hope that the simulationmodeling framework we describe in this article can be easily adapted to simulate various availability management situations in many business

Balancing Accuracy of Promised Ship Date and IT Costs

environments. The simulation framework has been used in IBM for several years, and has been playing a critical role in making strategic business decisions that impacted customer services DQGSUR¿WDELOLW\LQ,%0 The rest of chapter is organized as follows. In the next section, we describe the availability management process. In the following section, we describe how ship date promising is simulated in various availability refresh frequency. Then, we describe simulation experiments done for IBM’s server business, its impacts and results. Finally, we provide conclusion and remarks.

AVAILABILITY MANAGEMENT PROCESS The availability management typically consists of three main tasks: (1) generating availability outlook, (2) scheduling customer orders against WKH DYDLODELOLW\ RXWORRN DQG   IXO¿OOLQJ WKH orders. The process described here is based on IBM’s hardware businesses. For certain business, customer orders arrive without any advance noWLFHUHTXHVWLQJDVHDUO\SRVVLEOHIXO¿OOPHQWRI the orders, usually in a few days. For some other businesses, on the other hand, customers place orders in advance of their actual needs, often a few months in advance. Typically, this kind of customer places orders as early as 3 months before the requested delivery (due) dates, and early delivery and payment are not allowed. Many buyers in this environment purchase products based on DFDUHIXO¿QDQFLDOSODQQLQJDQGWKH\W\SLFDOO\ know when they want to receive the products and make payment. Generation of availability outlook, is a pushside of the availability management process, and it pre-allocates ATP quantities, and prepares searchable availability database for promising future customer orders. For certain business, availability outlook is generated by daily buckets, and the availability planning horizon goes out a

few weeks into the future. For some other businesses, the availability outlook is allocated by weekly buckets, and the availability is planned in a much longer horizon, often a quarter (3 months) into the future. ATP quantity is called Availability Outlook for this reason. The availability outlook is typically generated based on product type, demand classes, supply classes, and outlook time EXFNHWV7KHSURGXFWW\SHFDQEH¿QLVKHGJRRGV (FG) level for Make-to-Stock (MTS) business or components (Comp) level for Make-to-Order 072 RU&RQ¿JXUHGWR2UGHU&72 EXVLQHVV Demand classes can be geographic sales locations, sales channels, customer priority, sensitivity to GHOLYHU\GDWHVSUR¿WDELOLW\DQGGHPDQGTXDQWLW\ Supply classes can be a degree of constraints and value of products. Availability is pre-allocated into Availability Outlook buckets based on the dimension described earlier, and rolled-forward daily or weekly. The availability outlook is determined EDVHGRQWKHDYDLODELOLW\RIFRPSRQHQWV¿QLVKHG goods, WIP (work-in-process), MPS (master production schedule), supplier commitment, and SURGXFWLRQ FDSDFLW\ÀH[LELOLW\ :KHQ FXVWRPHU orders arrive, the availability outlook is searched in various ways according to scheduling polices to determine the ship (delivery) date, which is then promised to customers. Customer order scheduling is a pull-side of availability management, and it reacts to customer orders and determines ship date for the orders. Customer orders arrive with various information such as product type, the demand class, customer class, and due date. The order scheduler then searches through the availability RXWORRNGDWDEDVHDQGLGHQWL¿HVWKHDYDLODELOLW\ that meets the characteristics. The scheduling can also be done by an ATP engine that uses certain algorithm to optimize the scheduling considering various resources, policies, and constraints. 7KHVFKHGXOHUWKHQUHVHUYHVVSHFL¿FDYDLODELOLW\ against each order, and decrements the availability according to the purchase quantity of the order. The ship date of the order is determined from

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Balancing Accuracy of Promised Ship Date and IT Costs

the time bucket where the availability reserved, and it is promised to customers. However, if the availability data is not accurate, incorrect ship date might be determined and promised to customers. Depending on the business environment, various rules and policies are applied in this order schedulLQJSURFHVV([DPSOHVDUH¿UVWFRPH¿UVWVHUYHG policy, customer priority-based scheduling, and UHYHQXHRUSUR¿W EDVHGVFKHGXOLQJDQGVRIRUWK In a constrained environment, certain ceilings can also be imposed to make sure the products are strategically distributed to various demand classes. 2UGHU IXO¿OOPHQW LV H[HFXWLQJ WKH VKLSPHQW of the product at the time of promised ship date. (YHQLIDQRUGHULVVFKHGXOHGZLWKDVSHFL¿FSURPised ship date based on the availability outlook, the availability (ATP quantity) may not actually exist when the ship date comes. One reason for the inaccurate ship date is due to IT system that supports the availability management process. The order scheduling is done based on the availability outlook data in an IT system, which is typically refreshed periodically since it is very expensive to update the database in real time. The availability information kept in the IT system (system availability) is not always synchronized with the actual availability (physical availability). As the synchronization (refresh) frequency increases, the accuracy of promised ship date also increases; however, the resulting IT cost would also go up. Due to the potentially inaccurate view of the availability, an unrealistic ship date can be promised to customer. Therefore, for certain customer orders the necessary ATP quantity may not be there when the promised ship date arrives, thus FUHDWLQJ GLVVDWLV¿HG FXVWRPHUV 7KH LPSDFW RI ,7RQWKHIXO¿OOPHQWLVGLVFXVVHGLQGHWDLOLQWKH later section. A key role for effective availability management process is to coordinate and balance the push-side and pull-side of ATP as well as IT resources so that customer service target is met while corresponding IT cost is within budget.

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SIMULATION SHIP DATE PROMISING In this section, we describe the availability management simulation model that we develop to analyze the relationship between accuracy of promised ship date and IT costs. The model simultaneously simulates the three components of availability management process; generating availability outlook, scheduling customer orders DQGIXO¿OOLQJWKHRUGHUVDVZHOODVWKHHIIHFWRI RWKHUG\QDPLFVVXFKDVFXVWRPHUVKRSSLQJWUDI¿F uncertainty of order size, customer preferences of product features, demand forecast, inventory policies, sourcing policies, supply planning policies, manufacturing lead time, and so forth. The simulation model provides important statistical information on promised ship date, accuracy of the ship dates determination, scheduling delay, IXO¿OOPHQWUDWHDVZHOODVLQYHQWRU\OHYHO

Modeling of Availability Outlook Availability outlook (also called availability quantity) is modeled by multidimensional data array that represents various attributes of availability such as product type, demand class, supply class, and planning period. The product W\SHFDQEHHLWKHU¿QLVKHGJRRGVRUFRPSRQHQWV depending on whether the business is MTO or CTO. For a simple example, for a process where there are two attributes of availability (product type and time period), the availability outlook is represented by 2-dimensional data array shown as cylinders in the Figure 1. The availability outlook is time-dependent, for example, there is availability for the current period (t=1), and there is availability quantity for future periods (t=2, 3, …) as more availability quantity is expected to exist through production or procurement in the future dates. The availability time periods can be daily buckets or weekly buckets depending on the business environment. For example, in the Figure 1, the quantity 3 of component 1 is available in

Balancing Accuracy of Promised Ship Date and IT Costs

are determined as the order is generated in the order generation event (details described in the next section). For each line item, certain components are selected as the building blocks of the product using a distribution function representing customer preference of component features. For example, in the Figure 1, the line item #3 of the order # 231, requires components 1, 3 and 4, one unit each. )RUWKHRUGHUVWKDWDUHUHTXHVWHGWREHIXO¿OOHG as early as possible, the simulation model looks IRU VSHFL¿HG TXDQWLW\ RI D FKRVHQ FRPSRQHQW VWDUWLQJIURPWKH¿UVWWLPHSHULRGWRODWWHUWLPH periods until the availability of all the quantity LV LGHQWL¿HG ,Q WKLV H[DPSOH WKH WLPH SHULRGV (buckets) are in days. The component #1, the UHTXHVWHGTXDQWLW\RILVLGHQWL¿HGLQWKH¿UVW 3 days, 3 in day 1 (t=1), 5 in day 2 (t=2), and 2 in day 3 (t=3). Therefore, for the line item #3, the required quantity of component 1 is available by the third day. Similar search is carried out for FRPSRQHQWZKLFKLVDYDLODEOHRQWKH¿UVWGD\

the current day, and 5 more are expected to be available a day after, and 10 more are expected be available for day 3 and so on. The availability outlook can be determined from demand forecast and supply contracts, and so forth, but it can also be computed by push-side ATP optimization tool. The availability outlook is used in computing the ship date of customer requests and orders. The availability quantity changes as a result of many events in the business.

Simulation of Ship Date Promising The Figure 1 shows an example of how the ship date calculation is simulated in this work. Customer orders or ATP requests arrive in certain stochastic interval, usually modeled as a Poisson process. Each order has one or more line items, and each line item has one or more quantities. The order quantities are modeled with probability distribution functions which are derived based on historic data. The line items and quantities

Figure 1. Simulation of order scheduling and ship date calculation for as early as possible orders t=1

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Balancing Accuracy of Promised Ship Date and IT Costs

ability quantities are reserved (e.g., the availability is decremented) for the order. Typically, for each order, availability is reserved as late as possible so the availability in earlier time bucket can be used for generating favorable ship date for future orders. In this example as shown in the Figure 1, quantity of 10 for component 1 is reserved in t=3, and quantity of 10 for component 3 is reserved in t=3. However, for component 4, quantity of 5 is reserved for t=1, and another 5 is reserved t=2 instead of quantity 8 being reserved of for t=1 and 2 for t=2 because having availability of 3 at t=1 is more valuable than the availability of 3 at t=2 IRUVFKHGXOLQJDQGIXO¿OOLQJIXWXUHRUGHUV7KH scheduling logic can vary based on the business rules and policies. The scheduling can also be carried out by pull-side ATP optimization engine that optimizes order scheduling simultaneously considering inventory costs, backlog cost and customer service impact, and so forth. For the orders with advance due date, the VLPXODWLRQ PRGHO ORRNV IRU VSHFL¿HG TXDQWLW\

and for component #4, which is available by the second day. Therefore, the component availability of line item #3 of the order #231 is the third day. In this example, let us assume that the availability calculated for the line item #1 is eighth day, DQGWKDWRIWKHOLQHLWHPLV¿UVWGD\V:KHQ all the components are available, the product is assembled or manufactured, which takes certain amount of time. The manufacturing lead time can EHD¿[HGQXPEHURIGD\VRULWFDQEHGHVFULEHG with a distribution function. The lead time to ship date is then calculated by adding the manufacturing (assembly) lead time to the availability lead time. Assuming that the manufacturing lead time for this example is 2 days, the partial ship date for item #1 is tenth day, for item #2 is third day, DQGIRUWKHLWHPLV¿IWKGD\LIWKHFXVWRPHULV willing to receive partial shipments. And the total order ship date is tenth day from the date of order or request. Therefore, the promised ship date for the order #231 is ten days from the order date for this example. When this order is scheduled, avail-

Figure 2. Simulation of order promising and ship date calculation for advance orders t=1

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Due date (requested ship date)

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Balancing Accuracy of Promised Ship Date and IT Costs

of a chosen component starting from the time period of due date (requested ship date), searches backward into the earlier time periods, and then forward to later time periods until the availability RIDOOTXDQWLW\LVLGHQWL¿HGDVVKRZQLQWKH)LJXUH 2. For this example, the item 3 of the order #231 requires for the quantity of 10 of component #1, #2 and #3. However, in this case the order comes with requested ship date of t=3, say 3 days from the time of order. For component #1, the simulaWLRQPRGHO¿QGVWKHDYDLODELOLW\RIRQW DQG UHVHUYHWKHDYDLODELOLW\)RUFRPSRQHQWLW¿QGV quantity of 3 on t=3, then it searched backward WR ¿QG  PRUH TXDQWLW\ RQ W  DQG WKHQ PRYH IRUZDUGWR¿QGPRUHRQW %XWLQWKLVFDVH the simulation reserves availability quantity of 10 all on t=4 making availability quantity intact for t=2 and t=3 for future orders. For component WKHVLPXODWLRQPRGHO¿QGVDYDLODELOLW\RIRQ t=2 and t=3 each, and reserve them. In this case the overall availability date is t=4, a day after the due date. Therefore, the promised ship date for the order is t=4, a day past the requested ship date.

Event Generation In this work, the availability outlook changes as the result of four events; (1) demand event, (2) supply event (3) roll-forward event, and (4) data refresh event as shown in Figure 3. Each event changes the availability outlook; the demand event decrements the availability, the supply event increments the availability, the data refresh event refreshes the availability and the roll-forward event shifts the availability as explained in the next section. The data refresh event is the one that refresh (synchronize) system availability data. The events are generated independently XVLQJSUREDELOLW\GLVWULEXWLRQIXQFWLRQVRU¿[HG intervals. The model can be easily extended to include more events depending on the supply chain environment being modeled. The demand event is a pull-side of availability management, and it includes order scheduling

DQGIXO¿OOPHQW7KHGHPDQGHYHQWLVWULJJHUHG when customer orders are generated, and it decrements the availability outlook (quantity) when it schedules customer orders. Customer orders are generated in certain stochastic interval, usually as a Poisson process. At the time of the order generation, each order is assigned with one or more attributes such as quantity, product type, demand class, supply class, and due dates. This assignment of attributes is modeled with probability distribution functions based on historic sales data or expected business in the future. :KHQDQRUGHULVVFKHGXOHGVSHFL¿FDYDLODELOLW\ quantities are searched in the availability outlook, which are then reserved for the order and are decremented from the availability outlook. The UHVHUYDWLRQFRQVXPSWLRQ RIVSHFL¿FDYDLODELOLW\ can be decided by the various policies and rules, such the sourcing policy, scheduling polices and IXO¿OOPHQWSROLFLHV7KHUHVHUYDWLRQRIDYDLODELOLW\ outlook can also be determined by Availability Promising Engines described earlier. The ATP engines can be connected to the simulation model and communicate the optimal ATP reservation quantities to the simulation model. The supply event is a push-side of availability management, and it generates availability through schedules of production and procurement of components. The supply event is triggered in certain interval, for example, weekly or monthly, and it LQFUHPHQWVWKHDYDLODELOLW\RXWORRN$V¿QLVKHG products or building block components are reserved when customer orders are scheduled and IXO¿OOHGDGGLWLRQDODYDLODELOLW\LVDGGHGWRWKH availability outlook through production or procurement. This activity, supply event, is planned in advance, for example months, weeks or days before the availability are actually needed in order to accommodate the lead time for production and procurement. As a result of the supply planning, the availability outlook is updated and replenished. The replenishment quantity is typically determined based on the forecast of customer demand. The frequency and size of the replenishment are

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recorded in the availability database (static view of availability, or system availability). The system availability is the one that is used for scheduling of customer orders, and it not always accurate. The system availability is synchronized with physical availability only periodically because it is expensive to have IT architecture that allows real time synchronization. This synchronization between physical availability and system availability is modeled in the data refresh event. For example, the static view of availability is refreshed every few minutes, every hour, or even every few days. The discrepancy between the physical availability (dynamic view of availability) and the system availability (static view of availability) causes the inaccurate ship date calculation. In our simulation model, the ship date is computed using both dynamic and static view of the availability, as shown in the Figure 3, and the magnitude and frequencies of ship date inaccuracy are estimated. The accuracy of promised ship date is an important indication of customer service level. The data UHIUHVK HYHQW FDQ EH PRGHOHG DV ¿[HG LQWHUYDO

also decided by various replenishment policies. The allocation of availability outlook can also be determined by Availability Planning Engines, some of which described previously. These ATP engines can be connected to the simulation model and communicate the optimal ATP allocation to the simulation model. As simulation clock moves from a time bucket to another, the availability of products or components that have not been consumed are carried forward to an earlier time bucket. For example, at WKHHQGRIWKH¿UVWGD\WKHDYDLODELOLW\TXDQWLW\ of second day moves to the availability quantity RI¿UVWGD\DQGWKDWRIWKLUGGD\EHFRPHVWKDWRI second day, and so forth. Also, the availability TXDQWLW\QRWFRQVXPHGRQWKH¿UVWGD\VWD\VRQ the same day, assuming it is nonperishable. The UROOIRUZDUG HYHQW FDQ EH WULJJHUHG LQ D ¿[HG interval, for example, daily or weekly, depending on the business environment. There are two instances of availability outlook; one representing the availability quantity at real time (dynamic view of availability, or physical availability), and another representing availability

Figure 3. Multiple events that affect availability

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next step, the availability check (buy) task, and is submitted. A promised ship date is calculated again here using the availability outlook data and order scheduling policies. The submitted order goes through the order-processing task in the EDFNRI¿FHDQGRUGHUIXO¿OOPHQWSURFHVVZKHUH the availability is physically consumed. The tasks VSHFL¿HGDVUHFWDQJOHVLQ)LJXUHFDQKDYHFHUWDLQ processing time. They can also require certain resources such as an IT server, a part of whose resource is tied up in processing orders.

event or randomly generated event described by a distribution function. The analysis on how the refresh rate impacts the ship date accuracy is described in the following section. )LJXUHVKRZVDVLPSOL¿HGRYHUYLHZRIDYDLOability simulation model we developed. Here, the rectangles represent various tasks (and events), circles represent availability outlook and the arrows represent the movement of artifact (customer orders in this case). Generation of orders (or on-line VKRSSLQJ LVPRGHOHGLQWKH¿UVWUHFWDQJOHRQWKH left side of the Figure 4, and general availability of product, features and price are also available for customer here. The orders then proceed to the QH[WWDVNZKHUHDVSHFL¿FSURGXFWLVFRQ¿JXUHG from the availability of components. Ship date is also determined here in the availability check (shop) task, which accesses the IT system that contains availability outlook data. If the customer LVVDWLV¿HGZLWKWKHVKLSGDWHWKHRUGHUPRYHVWR

SIMULATION EXPERIMENTS AND RESULT The analysis for promised ship date and availability refresh described here is based on an actual business case for IBM’s computer hardware business. For the business, the ship date

Figure 4. A sample availability management simulation model RollForward Availability Data (Rollforward)

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Balancing Accuracy of Promised Ship Date and IT Costs

GLIIHUHQWGHPDQGFODVVHVIRUDVSHFL¿FEXVLQHVV setting of the IBM hardware business. Table 1 also summarizes the simulation results. In average, the ship date error went down to 1.4% from 3.2% as the refresh frequency increases from once a day to four times a day. However, the ship date error does not decrease substantially as the refresh rate increase beyond 3 times a day. This indicates that it is not worthwhile to improve IT system to refresh the availability more than 3 times a day for this particular business setting. Figure 7 shows the trade-off between ship date error and IT Cost for refreshing the availability outlook in the IT system. As it is shown, as the refresh rate increases from once a day to four times a day, the IT costs increase substantially from $1.2 million to $2.3 million. Although the general relationship between ship date error and ,7&RVWVDUHQRWDVXUSULVHWKHTXDQWL¿FDWLRQRI the trade-off is the key information that business leaders need to have to make sound business decision on the availability management process. The right decision is the balancing the ship date error (customer service) and IT costs that are reasonable for a business at the time of analysis. The

is determined and promised to customer during WKHFXVWRPHUV¶VKRSSLQJSURFHVVDW³:HEVSHHG´ Customers make decisions on purchase based on the promised ship date in addition to other criteria such as price and quality of goods. Once an order is placed, the customer expects the product to be delivered on the promised date. Often, keeping the promised ship date is more important than the promised ship date itself. Therefore, the accuracy of promised ship date is very closely related to customer service. In this business case, we used the availability simulation model to evaluate how the frequency of availability data refresh affects the accuracy of ship date information given to customers. Figure VKRZVVKLSGDWHHUURUSUR¿OHIRUPRQWKVSHriod for a product and for a demand class when the frequency of availability data refresh is once D GD\ 7KH ¿JXUH VKRZV WKDW WKHUH DUH TXLWH D few occurrences of the ship date error, whose magnitude is mostly 1 week. The magnitude of the ship date error increases to 2 weeks toward the end of the quarter. Figure 6 compares ship date errors for four refresh frequencies, for orders arriving with three

Figure 5. Ship date error for DM class 1 with once a day refresh Ship Date Error

3

Week

2

1

0 0

200

400

600

800

1,000

1,200

orders

630

1,400

1,600

1,800

2,000

Balancing Accuracy of Promised Ship Date and IT Costs

Figure 6. Ship date error for 3 various refresh frequencies

Ship Date Error vs Refresh Frequency 6.00

Ship Date Error (%)

5.00 4.00 3.00 2.00 1.00 0.00 1/day

2/day

3/day

4/day

refresh frequency DM Class 1

DM Class 2

DM Class 3

Weighted Average

Table 1. Ship date error summary for various refresh frequencies

Ship Date Error Twice a day 3 Times a day 4 Times a day Refresh Frequency Once a day DM Class 1 2.16% 1.51% 1.01% 1.04% DM Class 2 3.25% 1.84% 1.33% 1.13% DM Class 3 5.00% 3.00% 2.46% 2.39% Weighted Average 3.22% 2.00% 1.49% 1.42%

simulation results from this case study clearly show that IT system that refreshes the availability LQÀXHQFHVWKHDFFXUDF\RIVKLSGDWHFDOFXODWLRQ when customer orders are processed. Simulation

is a key tool to determine the trade-off between IT costs and supply chain performance. For this particular business environment, once a day refresh was decided as a reasonable frequency.

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Balancing Accuracy of Promised Ship Date and IT Costs

Figure 7. Trade-off between ship date error and IT costs

4.00

2.4

3.50

2.2 2

3.00 1.8 2.50 1.6 2.00 1.4 1.50

1.2

1.00

1 1/day

2/day

3/day

Ship Date Error (%)

The simulation models described earlier in the section for the case studies were all validated by examining the simulation outputs of the AS-IS cases with actual data from the business. After the validation of the AS-IS cases, simulation models of TO-BE cases were used for analysis.

CONCLUSION In the current dynamic, competitive business environment, customers expect to see products they purchase to be shipped on the date it was promised. However, accurate calculation for promised ship dates can only be obtained at the expense of IT systems that provide accurate availability data. Our study indicates that refresh frequency of availability data substantially impacts accuracy

632

IT Costs ($ million)

Ship Date Error (%)

Ship Date Error vs IT Costs

4/day IT Costs

of the ship date that is promised to customer. The value of customer service levels corresponding to accuracy of promised ship date needs to be estimated against the costs of having the necessary IT system. The estimation requires a simulation model of availability management process. In this article, we describe how to model and simulate the availability management process, and to quantify the customer service level resulting from various availability refresh rate. This work has helped business leaders in making informed decisions of balancing customer services and costs.

ACKNOWLEDGMENT The author would like to thank Joseph DeMarco, and Daniel Peters of IBM Integrated Supply

Balancing Accuracy of Promised Ship Date and IT Costs

Chain (ISC) group for sharing their knowledge and experience in IBM’s availability management processes and providing technical advices.

REFERENCES Bagchi, S., Buckley, S., Ettl, E., & Lin, G. (1998). Experience using the IBM supply chain simulator. In Proceedings of the 1998 Winter Simulation Conference. D. J. Medeires, E. F. Watson, J. S. Carson & M.S. Manivannan (Eds.) (pp. 1387-1394). Ball, M.O., Chen, C-Y., & Zhao, Z-Y. (2004). Available to promise.. In D. Simchi-Levi, D. Wu, Z. M. Shen (Eds.), Handbook of quantitative analysis: Modeling in an-e-business era (pp. 446-483). Kluwer Brown, K. L., Inman, A., & Calloway, J. A. (2001). Measuring the effect of inventory inaccuracy in MRP inventory and delivery performance. Production Planning and Control, 12(1), 46-57. Chen, C-Y., Zhao, Z-Y., & Ball, M. O. (2002). A model for batch advanced available-to-promise. Production and Operations Management, 11(4), 424-440. DeHoratius, N. & Raman, A. (2004). Inventory record inaccuracy: An empirical analysis. Working paper. University of Chicago. Ervolina, T. & Dietrich, B. (2001). Moving toward dyanamic available to promise. In S. Gass & A. Jones (Eds.), Supply chain management: Status and future research. Preprints produced by R. H. Smith School of Business, University of Maryland and Manufacturing Engineering Lab. Fleisch, E. & Tellkamp, C. (2005). Inventory inaccuracy and supply chain performance: A simulation study of a retail supply chain. International Journal of Production Economics, 95(3), 373. Hieta, S. (1998). Supply chain simulation with LOGSIM-Simulator. In Proceedings of the 1998

Winter Simulation Conference. D. J. Medeires, E. F. Watson, J. S. Carson, & M. S. Manivannan (Eds.) (pp. 323-326). Iglehart, D. L. & Morey, R. C. (1972). Inventory systems with imperfect asset information. Management Science, 8, 18. Kang, Y. & Koh, R. (2002). Applications research, research report. Auto-ID Center, MIT. Kang, Y. & Gershwin, S. (2004). Information inaccuracy in inventory systems stock loss and stockout. Joint MIT/INFORMS Symposium. Krajewski, L. J., King, B. E., Ritzman, L .P., & Wong, D. S. (1987). Kanban, MRP, and shaping The manufacturing environment. Management Science, 33(1), 39-57. Lee, Y. M., Cheng, F., & Leung, Y. (2004). Exploring the impact of RFID on supply chain dynamics. In Proceedings of the 2004 Winter Simulation Conference. R .G. Ingalls, M. D. Rossetti, J. S. Smith, & B. A. Peters (Eds.) Retrieved July 27, 2007, from http://www.informs-sim.org/wsc04papers/147.pdf McClelland, M. (1992). Using simulation to facilitate analysis of manufacturing strategy. Journal of Business Logistics, 13(1), 215-237. Moses, S., Grand, H., Gruenwald, L., & Pulat, S. (2004) Real-time due-date promising by buildto-order environments. International Journal of Production Research, 42, 4353-4375. Pan, Y. & Shi, L. (2004). Stochastic on-line model for shipment date quoting with on-line delivery gurantees. In Proceedings of the 2004 Winter Simulation Conference, R. G. Ingalls, M. D. Rossetti, J. S. Smith, & B. A. Peters. Wayman, W. A. (1995). Inventory accuracy through warehouse control. Production and Inventory Management Journal, 36(2), 17. Yee, S-T. (2002). Establishment of product offering and production leveling principles via

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supply chain simulation under order-to-delivery environment. In Proceedings of the 2002 Winter Simulation Conference. E. Yücesan, C. H. Chen,

J. L. Snowdon, & J. M. Charnes (Eds.) (pp. 12601268).

This work was previously published in the International Journal of Information Systems and Supply Chain Management, edited by J. Wang, Volume 1, Issue 1, pp. 1-14, copyright 2008 by IGI Publishing (an imprint of IGI Global).

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Chapter 2.19

Developing and Delivering Online Courses Jayavel Sounderpandian University of Wisconsin-Parkside, USA Manohar Madan University of Wisconsin-Whitewater, USA

ABSTRACT Distance education, which started out with closed circuit TV technology, has evolved into completely online courses. Not surprisingly, online education has emerged as a major form of e-business. This chapter offers helpful suggestions for those who are planning to develop and deliver online courses, either as part of an existing degree program or as a new totally online degree program. Wherever needed, an online MBA program is used as an example. The chapter considers such things as mission, curriculum planning, curriculum control, marketing, scheduling, course development, expectations from students and faculty, and strengths and weaknesses of online education.

INTRODUCTION Traditional classroom (or face-to-face, or F2F) instruction requires the students and instructor

to be at the same place at the same time. In other words, the instructor and the students are place bound and time bound. Early forms of distance education1 removed the need for them to be place bound. The earliest form of distance education started with the closed-circuit TV technology, where the audio and video signals of an instructor’s lecture were transmitted to a distant location so WKDWVWXGHQWVDWWKDWORFDWLRQFRXOGDOVR³DWWHQG the class.” A clear advantage of this technology was that it eliminated or greatly reduced commuting needs for students and instructors. Later, the signals were compressed and carried via closed circuit or broadcasted using a satellite so that the signals could be delivered to several remote ORFDWLRQVHI¿FLHQWO\&RQVHTXHQWO\FRPSUHVVHG video became a popular technology for distance education. The advent of Internet changed the technology radically so that asynchronous communication could be utilized. Reading materials and activities of a course could be stored at a Web site for

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Developing and Delivering Online Courses

secure access from anywhere at any time. StuGHQWVDQGLQVWUXFWRUVFRXOG³FRPHWRWKHFODVV´ individually at a time convenient to them and carry out all classroom activities. This turned out to be a great convenience to them, because not only are they not place bound but now they are also not time bound. As a result, demand for online education grew rapidly. Today, a Google VHDUFKRIWKHSKUDVH³RQOLQHHGXFDWLRQ´SURGXFHV more than a billion hits. Worldwidelearn.com, DirectoryofSchools.com, USNews.com and GetEducated.com are good Web sites to get a list of available online degree programs. For a survey of literature on distance education, including online education, see Bryant et al. (Bryant, Kahle, & Schafer, 2005). MBA has been a popular degree program since the 1960s, and it still enjoys a high demand. It is no wonder that online MBA programs are increasing in popularity, because the advantages of being not place bound and not time bound are especially attractive to business employees. Private and public schools have raced to claim their share of the online market. Crawford (2005) reports an estimate of 125,000 online MBA students in the year 2005. A list of well-recognized MBA programs can be found at the Web site, BusinessWeek.com, and online MBA programs at GetEducated.com. Since many online programs are constantly being added and deleted, most lists are not up-to-date. Online training of employees has also been increasing rapidly. Corporations have found it more cost effective to train their employees using online programs. Such programs eliminate the need for employees to travel, saving a sizeable amount of money for the company. For details on the advantages of online training of employees, see Blake et al. (Blake, Gibson, & Blackwell, 2005).

636

CONSONANCE WITH THE MISSION A university interested in starting an online GHJUHHSURJUDPVKRXOG¿UVWH[DPLQHLIVXFKDQ action is in line with its mission. The university may have an obligation to its on-site students as laid out in its mission. Starting an online program should not in any way jeopardize that obligation. A reason for concern is that the new program will need substantial investments during the beginning years, and some recurring needs for resources in later years. In return, of course, the RQOLQHSURJUDPSURPLVHVWRJHQHUDWHVXI¿FLHQW revenues in future years. However, Folkers (2005) has cited several examples of failures of online education. Such examples and their reasons for failure will have to be analyzed to ensure that the contemplated online program will succeed and existing on-site programs will not be adversely affected. Folkers (2005) also provides a detailed discussion of incorporating online education as part of higher learning. An additional consideration with respect to the mission is whether the online program is EHQH¿WLQJWKHFOLHQWHOHLQWHQGHGLQWKHPLVVLRQ For instance, suppose the mission implies service to only a regional population. The economics of an online program may require admitting a large proportion of students from outside the region. Whether this affects the mission of serving the region should be carefully examined. It could be that by offering an online program that educates nonregional students, a university generates substantial additional income that can be used to educate regional students F2F. In this case, the RQOLQHSURJUDPZLOOEHMXVWL¿HG7KHLQVWLWXWLRQ may also consider amending the mission in light of online opportunities. For certain programs, the mission may call for maintaining a minimum quality level, usually in the form of maintaining an accreditation. For MBA programs, the accreditation by AACSB International (Association for Advancement of

Developing and Delivering Online Courses

Collegiate Schools of Business, International) is valued highly. The accreditation standards call for certain minimum requirements in starting new programs and maintaining the quality of an existing program that is newly delivered online. 7KH VWDQGDUGV DUH UH¿QHG FRQWLQXDOO\ DQG WKH current information can be found at the AACSB Web site (http://www.aacsb.edu). At the time this article was written, the standards for every new program required the following. Demand Analysis $MXVWL¿FDWLRQIRUVWDUWLQJDQHZSURJUDPUHTXLUHV a proof of healthy demand for the program. This may be done in several ways. One way is to conduct a survey of the intended market. Another way is to analyze the demand for existing similar programs at other comparable schools and apply it to the intended program at the intended location. Resource Analysis As already explained, the new program will need ¿QDQFLDO LQVWUXFWLRQDO DQG DGPLQLVWUDWLYH UHsources. These requirements should be estimated, DQGUHVRXUFHVPXVWEHLGHQWL¿HG Learning Goals For any new program, a set of learning goals VKRXOGEH¿QDOL]HG/HDUQLQJJRDOVVKRXOGEHHVtablished not only for each course, but also for the whole program. AACSB is keen on program-level learning goals, and expects detailed processes for assurance of learning. These processes are discussed next. Assurance of Learning For each program level learning goal, processes should be in place to ensure that at least some minimum percentage of students are achieving

those goals before they graduate. The assurance that a particular student has achieved a particular goal can come about through embedded exercises and exam questions in selected courses. The assessment of a student’s achievement of DJRDOVKRXOGEHYHUL¿HGE\DJURXSRIIDFXOW\ members rather than by a single person, preferably including some outsiders. When the number of students in the program is large, sampling a representative set of students and assessing only the sampled students is admissible. A detailed discussion of assurance of learning is presented in a subsequent section.

Organizational Structure Developing and delivering online courses involve many personnel whose efforts need to be coordinated. It also involves a considerable amount of monetary investment. Needless to say, the whole process needs to be systematically organized. The commonly observed organization structure is shown in Figure 1. At the top we have the Project Management Team, which typically consists of representatives from university administration, faculty, and technical services. This team is responsible for managing the whole project, with special attention to budgets and deadlines. Below it are the Curriculum Planning and Control Committee, the Technical Services Committee, and the Marketing and Public Relations Committee. The functions of Curriculum and Technical Services Committees are described in some detail. The Marketing and Public Relations Committee is responsible for building the image of the program and recruiting students. The developers of individual online courses report to the Curriculum Planning and Control Committee, and the Web technicians report to the Technical Services Committee. The Project Management Team should be aware of possible turnover of personnel, especially among the Web technicians, and must be prepared to manage it.

637

Developing and Delivering Online Courses

Figure 1. Organization chart for online course development

Course Development Project Management

Curriculum Planning & Control Committee

Individual Course Developers

Technical Services Committee

Technicians

The organization chart in Figure 1 applies only to the course development phase. After the courses are developed and the program is started, other entities such as course instructors, business services, and student information system come into play.

REVENUE ALLOCATION 7KH¿QDQFLDOVLGHRIRQOLQHFRXUVHGHYHORSPHQW and delivery can be different from that of onsite development and delivery due to the differences that exist between the two modes. Essentially, there are the following cost centers that would need to share the revenue: • • • • • • •

638

Program administration Instruction Technical services Student information system Student services Business services Marketing

Marketing and Public Relations Committee

Program administration is the owner of the enterprise and holds the equity. The administration needs to arrive at a formula for sharing the revenue among the cost centers. The formula may LQFOXGH¿[HGSD\PHQWVSOXVDSHUFHQWDJHRIWKH revenues. For example, at the course development stage, the instructors who develop the course DUHSDLGD¿[HGDPRXQWXVXDOO\DFFRUGLQJWRD negotiated contract. When a course is offered, WKHLQVWUXFWRULVXVXDOO\SDLGD¿[HGDPRXQWWR teach that course. Some universities may pay an additional bonus on a per-student basis, recognizing the fact that the teaching effort increases with the number of students in the class. Occasionally, an instructor may be paid a bonus for teaching H[FHOOHQFHWKDWLVUHÀHFWHGLQVD\WKHVWXGHQWV¶ feedback on instructor performance. 6LPLODUO\DWWKHEHJLQQLQJRIDFRXUVHD¿[HG amount of effort from technical services department is needed to set up the Web site. Additionally, as the course proceeds, the technical effort needed for the course increases with the number of students in the course. The technical service

Developing and Delivering Online Courses

GHSDUWPHQWLVWKHUHIRUHSDLGD¿[HGVXPSOXVD per-student fee. Student information system keeps track of student enrollments and grades. Student services LQFOXGHDGYLVLQJ¿QDQFLDODLGDQGFRXQVHOLQJ 7KHVHVHUYLFHVZLOOLQFXUERWK¿[HGDQGSHUVWXdent costs. Finally, the marketing department may EHSDLGD¿[HGIHHIRUUXQQLQJWKHDGYHUWLVHPHQWV and recruiting students. The department may be SDLGD¿[HGDPRXQWSHU\HDUIRUDGYHUWLVLQJHIIRUWV and a per-student amount for students recruited by that department.

CURRICU M U L

be designed. But if the planned online program is completely new, then the whole curriculum of the program needs to be carefully designed. The ¿UVWVWHSLVWR¿QDOL]HWKHOHDUQLQJJRDOVIRUWKH curriculum as a whole, which will serve as a guide for developing individual courses. Because the overall curriculum plan drives all the individual courses, this plan is very important. It should be designed by a Curriculum Planning and Control Committee of faculty members, with representation from each functional area of the program. The curriculum plan for an MBA program will typically include foundation courses, core courses, and elective courses. The foundation courses are needed for those who enter the program without a business background, such as science or engineering graduates. Those who have a recent

PL ANNING

If an existing F2F program is being planned for online delivery, then no new curriculum needs to

Figure 2. The concepts vs. courses matrix

ACCT ACCT FIN 701 702 731

Required Courses FIN HRM HRM MIS MKT MKT 732 741 742 721 751 752

...

Accounting Double Entry Method Financial Statements

x x

Costing Methods Activity Based Costing Transfer Pricing GAAP

x

x x x x x

x

...

Finance Time Value of Money Financial Ratios Cost of Capital Working Capital Mgmt Financial Markets Financial Institutions Investment

... Human Res. Mgmt. Info. Systems

x x

x x x

x x x x x x An x mark in the matrix entry implies the topic on the row is covered in the course on the column.

Marketing

Business Strategy

639

Developing and Delivering Online Courses

undergraduate degree in business are usually waived from foundation courses. The core courses are required of all students. They are expected to cover all the functional areas of business, and additionally, essential components such as ethics, leadership, communication, global economy, and information technology. Finally, there should be opportunity for the students to integrate their knowledge gained from various functional areas and apply them to tackle real or hypothetical business problems. Real-world case studies are routinely employed for this purpose. An important requirement of the core courses is that together they should cover all the concepts that are necessary to achieve the learning goals set for the program. Electives are meant to give a student the opportunity to specialize in an area that he/she wishes. AACSB requires at least a total of 30 credits for core and elective courses put together. If a school has a total of 30 credits in its MBA program, it is common to see anywhere between 9 to 15 credits of electives. A simple technique that may be used to summarize the essential part of the curriculum plan is the concepts vs. courses matrix. Though simple, the matrix proves to be an effective tool. The rows in the matrix represent the concepts (or topics) that are planned to be covered in the program. The columns are the required courses in the program. (See Figure 2.) The entries in the matrix are either a check mark to show that a concept is covered in the corresponding course, or a number that represents the hours that an average student spends on that topic by completing the program. Such a matrix gives a nice summary of the curriculum with respect to the concepts planned in the curriculum. It helps not only the implementation of the plan, but also the maintenance of the whole curriculum. For instance, if a course is revised for any reason, the matrix can be used to ensure all the concepts that are necessary to keep in the revised version. In the next section, we shall see how to implement this plan.

640

CURRICULUM IMPLEMENTATION AND MAINTENANCE Curriculum control is necessary for any program, whether it is online or F2F, for proper implementation. Fortunately, curriculum control is a lot easier in online programs, because the content FDQ EH HDVLO\ YHUL¿HG E\ MXVW ORRNLQJ LQWR WKH course Web site. The process of collecting data for concepts vs. courses matrix is as follows. For every required course, the instructor of the course submits a course overview form to the school. (See Figure 3.) At the top of the form there are details such as course name and number, semester, instructor name, and textbook used. Below this information is a matrix where the rows are the concepts and the columns are the weeks of the course. If there are 8 weeks of classes, then there will be eight columns in the matrix. The instructor of the course enters, at the top of each column, the list of activities that the students perform that week, and the description of the concept along the rows. (Later in this chapter it will be seen that every course is WREHDVVLJQHGD³IDFXOW\LQFKDUJH´RILWVFRQWHQW If the instructor is not the faculty-in-charge, then the instructor will consult the faculty-in-charge LQGHVLJQLQJWKHFRXUVHFRQWHQWDQG¿OOLQJLQWKH course overview form.) The entries in the matrix are the number of hours an average student spends on each topic. By collecting this information for all required courses, the coverage of the concepts can be summarized. A spreadsheet format is very convenient for this purpose. All course overview forms are organized as worksheets within a single workbook, and a summary sheet in the front adds the number of hours spent on each concept. The summary sheet thus provides a listing of concepts and the emphasis placed on each concept in the program. This information is very valuable for curriculum control. Each sheet workbook can serve as a record of course content that can be communicated to any other instructor who is asked to teach the same

Developing and Delivering Online Courses

Figure 3. Course overview form Course Overview Name of the Course: Name of the Instructor: Textbook Used: Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8

Learning Activities Assessed Topics Topic 1 Topic 2 Topic 3 Topic 4 Topic 5 Topic 6 Topic 7 Topic 8 Topic 9 Topic 10

Total

The entries in the matrix are hours spent by a typical student during the week on the topic

course. The individual course sheets and the summary sheet should be continually updated. It should be noted that the course overview IRUPVDQGWKHVXPPDU\DUHRQO\³LQSXWV´WRWKH students. More actions and documentation are needed to achieve assurance of learning. In the case of MBA programs, the accrediting body, AACSB, is less interested in the inputs, and a lot more interested in assurance of learning. This brings us to the next section on assurance of learning.

ASSURANCE OF LEARNING Assessment of a program is necessary to maintain and continuously improve its quality. The literature on assessment is very vast. Suskie (2004), Walvoord (2004), Gronlund (2005), and Palomba and Banta (1999) are standard references

for assessment. Lately, the emphasis has shifted to learning from teaching. Thus, one should concentrate on assurance of learning rather than the teaching aspects in a program. The important steps in assurance of learning are:  'H¿QHOHDUQLQJJRDOV 2. Provide students opportunities for achieving the learning goals. 3. Assess student learning. 4. Use assessment results to assure learning. /HDUQLQJ JRDOV DUH GH¿QHG XVLQJ %ORRP¶V taxonomy (Bloom, 1984). For MBA programs, AACSB recommends four to eight such goals at the program level. At the individual course level, there will be separate sets of goals. The difference in program-level learning goals (PLLGs) compared to course-level learning goals (CLLGs) is that PLLGs are to be tracked more closely

641

Developing and Delivering Online Courses

than CLLGs. One way to track PLLGs is to create a (fake) online course using the software Desire2Learn (D2L) for assurance of learning, and enroll all active students in it. D2L allows an online grade book that can be set up to track the progress of each student against each PLLG. 7KLV PDNHV IRU DQ HI¿FLHQW ZD\ WR DVVXUH WKDW every student achieves every PLLG. The second step is to provide opportunities to students to achieve the learning goals. For example, if attaining public speaking skills is a goal, then it is not enough to just ask the students to speak at a public forum. The curriculum should include a required course where students are taught public speaking principles. The concept vs. course matrix in Figure 2 can help to ensure that learning opportunities exist in the curriculum for every goal. The next step is assessment of each learning goal. One way to assess CLLGs of core courses is to employ the standardized tests offered by the Educational Testing Service (ETS). ETS offers tests for many majors including business administration at the undergraduate and graduate levels. Such tests are called Major Field Tests, and are available at reasonable cost. The advantage of the Major Field Tests is that they have external validation, and can be used to compare one institution with another or the national average. Interested readers should consult the ETS Web site (http://ets.org) for the availability and details of standardized tests in a desired major. 7KH¿QDOVWHSFORVHVWKHORRS5HVXOWVIURP the assessment of student achievement should be formally compiled and used for continuous improvement of the curriculum. A committee comprising faculty and other stakeholders should ORRNDWWKHFRPSLOHGUHVXOWVORFDWHGH¿FLHQFLHVLQ student performance, and formulate action plans WRUHPRYHWKRVHGH¿FLHQFLHV Almost all the literature on assurance of learning or assessment assumes onsite courses rather than online courses. Online courses may

642

need some special treatment. Marks et al. (Marks, Sibley, & Arbaugh, 2005) discuss numerous aspects of online courses and how they may affect student learning. Such studies can help a school formulate special plans for assurance of learning. They can also help to formulate action plans for improving the curriculum after receiving a formal assurance of learning report.

Technical Support Offering online courses need extensive technical support from a technical department. Technical support is crucial to the success of the program. Typically, the technical support provider is responsible for the following tasks. Maintain the Web Servers The service provider has to use reliable hardware DV:HEVHUYHUV7KHVHUYHUVVKRXOGKDYHVXI¿FLHQW capacity to handle the peak projected demand for Internet communication, assuming all the students are online at the same time. Provide Course Development Support Faculty members will have to work closely with technicians in developing the Web pages of a course. If the page requires advanced features such DVYLGHRDQGDXGLR¿OHVWKHQHHGHGVXSSRUWZLOOEH correspondingly more. Additionally, there will be ongoing revisions to the course content. Processes must be in place to take care of revisions. Place the Courses Online When a course is developed, it will have to be made available at the desired URL. The technicians should place the courses at the URL in a timely manner so the instructors can check it well DKHDGRIWKH¿UVWGD\RIFODVVHV

Developing and Delivering Online Courses

Provide Technical Support to Students

Marketing Plans

2QHLPSRUWDQWEHQH¿WRIRQOLQHHGXFDWLRQLVWKH WHPSRUDOÀH[LELOLW\WKDWLVSURYLGLQJFKRLFHRI time of learning to the students (Demirdjian,   $V RQOLQH OHDUQLQJ UHTXLUHV VLJQL¿FDQW use of technology, students will invariably face technical problems. Hence, students will require DVVLVWDQFHIURPTXDOL¿HGWHFKQLFLDQVWRDQVZHU their questions on a 24/7 basis.

The need for marketing an online degree program cannot be overemphasized. A typical online program may have the ability to attract a number of potential students outside the region. A good marketing plan should include advertising at popular Web sites. In the case of MBA, this could be Businessweek.com. There are also specialized Web sites such as GetEducated.com and Onlinedegrees.net. Of course, the university must have its own attractive Web site. Many students will check a program’s Web site to estimate the quality of the program. To attract regional students, it is necessary to resort to traditional methods of marketing and promotion. Printing well-designed brochures and mailing them to local businesses and potential students is a must. Additionally, the university should conduct open houses and other forms of informational sessions. Offering scholarships is another way to attract students who may otherwise go elsewhere. Since many potential students may be outside the region, the university must use recruiting agents who travel to other campuses and educational fairs, domestic and foreign, to advertise the program or conduct informational sessions. A recent phenomenon is the emergence of commercial agencies that offer recruiting services. In populous countries such as India and China, such agencies provide local expertise in recruiting HIIRUWV6XFKDJHQFLHVEULQJVLJQL¿FDQWHI¿FLHQcies in recruiting and tend to be quite successful in identifying and attracting a sizeable number RISURVSHFWLYHVWXGHQWVZKRVDWLVI\WKHVSHFL¿HG admission requirements.

Maintain Uniformity of Web Pages Across Different Courses Students would expect/prefer standardization of format of lectures, assignments, discussions, and exams in all courses. The technicians are expected to convey to the faculty their schemes for formatting the different items in course Web pages, and maintaining uniformity of pages across all courses. Conduct Student Surveys for Feedback Online courses require more frequent monitoring than on-site courses. It is customary to conduct a course evaluation at least twice, midway through the course and at the end, in order to facilitate continuous improvement. Since this needs a survey to be conducted online, the technicians are once again involved. As can be seen from the list of duties for techQLFDOVWDIILWLVYHU\LPSRUWDQWWRKDYHTXDOL¿HG and reliable technical support. A school may or may not have such capability within the campus. While on-campus technical support is common, PDQ\VFKRROVGRXVHFRPPHUFLDORXW¿WVIRUWKH purpose. If a school is planning to employ a comPHUFLDORXW¿WQHHGOHVVWRVD\WKHRXW¿WVKRXOG be selected carefully.

Scheduling Another important part of the plan for a new program is the scheduling of courses. The required

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courses and electives have to be offered so that a typical student can graduate within a reasonable time. Indeed, it is best to list the courses that a typical student would take in each semester. Aggregating this over all students, who may enter into the program at different times, one can arrive at the courses that need to be offered each semester. Depending upon the number of students in the program, this requirement sets a minimum frequency and minimum number of sections of each course. This plan, in turn, determines the teaching capacity needed. Thus, the number of courses required to graduate, the number of students in the program, the time taken by an average student to graduate, and the planned schedule for offering the courses determine the capacity needed. The university should ensure that the capacity can be made available without disrupting other programs. The time to graduate is an important parameter. To understand its implication, consider a program with a total of 32 credits (which is common in MBA programs). Suppose the curriculum consists of 16 two-credit courses, which we shall designate as A1, A2, A3, A4, B1, B2, …., D4. Courses usually have a prerequisite structure. We will assume a simple prerequisite structure: A1 is a prerequisite for A2; A2 is a prerequisite for A3, A3 is a prerequisite for A4, B1 is a prerequisite for B2, …, D3 is a prerequisite for D4. Each course runs for 8 weeks, and a semester is 16 weeks long. Suppose a student can handle only one course at a time, and thus takes two courses per semester, which are offered one after the other in the same semester. Consider the case of 25 new students entering the program every year. When a steady state is achieved, the scenario that evolves in terms of courses offered and enrollment in each course over a period of 1 year may be depicted DVLQ)LJXUH7KHWDEOHLVUHDGDV¿UVW\HDU VWXGHQWVHQUROOLQ&RXUVH$LQWKH¿UVWKDOIRIIDOO semester and in course A2 during the second half, and so on. After completing Courses A1 through

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A4, a student becomes a second-year student and moves on to B courses. Notice that the university will have, at any time, a total of 100 active students, and will need to track that many students. With the same capacity, the same curriculum, the same number of students admitted per year, and the same schedule of course offerings, now suppose a student can take two courses at a time. Then the students will need only 2 years to graduate, and the scenario will be as shown in Figure 5. This table is read as: 25 ¿UVW\HDUVWXGHQWVHQUROOLQFRXUVHV$DQG%LQ WKH¿UVWKDOIRIWKHIDOOVHPHVWHUFRXUVHV$DQG B2 in the second half and so on. Notice that now there are only 50 active students to keep track of. Encouraging students to take more courses at the same time can reduce some cost for the university for the same throughput. (This is indeed a strategy advocated in operations management to reduce work-in-process inventory.) The relationship between various parameters can be summarized using some equations and formulas. Let C = total credits required for graduation c = credits that a typical student takes in a year T = the average time to graduate. Then T = C/c years. Let e = the rate of enrollment in students/year S = the average number of active students in the program Then S = e(C/c) = eT. Some of these parameters will be useful in computing certain costs. For example, if a student information system costs x dollars per student per year, then the annual cost of the system for a given program will be xS = xeT = xe(C/c). This goes to show that as c increases the cost decreases. Since many other administrative costs also fol-

Developing and Delivering Online Courses

Figure 4. The scenario where an average student takes 4 years to graduate Total 100 students 25 I year Students 25 II year Students 25 III year Students 25 IV year Students

Fall Semester A1 A2 B1 B2 C1 C2 D1 D2

Spring Semester A3 A4 B3 B4 C3 C4 D3 D4

Figure 5. The scenario where an average student takes 2 years to graduate Total 50 students 25 I year Students

Fall Semester A1 A2 B1 B2

Spring Semester A3 A4 B3 B4

25 II year Students

C1 D1

C3 D3

low the same pattern, it is safe to say that there will be cost savings as c increases. It is generally believed that because online courses avoid commuting, students are willing to take more credits in a year, implying c will be larger and, therefore, many types of administrative costs will be less for online courses, Let k = average class size for a course. Then the minimum number of sections of the course to be offered in a year = e/k. Let y = cost per credit of teaching a section of a course (assumed to be the same for every course). Then total annual teaching cost = y (e/k) C, Because the cost is inversely proportional to k, there is a tendency to increase k. It has there-

C2 D2

C4 D4

fore become a common practice to use k as one of the measures of quality of education at an institution. The maller the value of k, the higher is the perceived quality. Let z = tuition fee per credit. Then the total annual revenue = zSc = zeC. Since S and c are related, it is better to use the expression zeC to analyze interrelationships. Note that z and C are easily controlled by the university. Because a university may increase one or both of them in its enthusiasm to increase revenue, the value of zC, which is the total tuition for the whole program, is used in rating a program. Higher the value of zC, more cautious the students will be in enrolling in the program.

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Revenues from tuition fees and government grants are to be compared against the costs. The costs include the cost of instructors, technical staff, academic and administrative overhead, technical overhead, and curriculum development FRVWV,WLVGLI¿FXOWWRJLYHDQ\JXLGHOLQHVDERXW these costs because they vary widely depending on the type of university. A cost that is unique to online courses is the cost of course development. Even this cost can vary widely. Boettcher (2002) provides an estimate that it can vary anywhere from $92,000 to $368,000! The school should carefully estimate its costs. Needless to say, a comparison of total revenues and total costs is QHFHVVDU\ IRU ¿QDQFLDO FRQWURO DQG VXFFHVV RI the program.

Course Development The process of developing courses is extensive DQGLWKDVJUHDWLQÀXHQFHRQWKHTXDOLW\RIWKH curriculum. It therefore has to be controlled well, and will require a lot of effort. 7KH ¿UVW VWHS LQ GHYHORSLQJ D FRXUVH LV WR train the developers. (It is assumed that the university has already designed the content of the whole curriculum and the individual courses, as described under the sections on curriculum planning and curriculum control. It is also assumed that the technical support has been hired, as described in the section on technical support.) Training will require assistance from technicians as well as content specialists. Technical training requires the developers to learn the essentials about the software that is going to be used for creating course Web sites. Types of technology necessary to deliver online courses are listed by Folkers (2005). Currently, commonly used software is Desire2Learn or D2L. Additionally, the developers also learn some pedagogical and technical aspects of developing online courses. For instance, the developers need to know the strengths and weaknesses of online courses (most of which are discussed later in this chapter). They

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need to know what type of technical feature, such as quiz or discussion, is suitable for different topics. Some technical features are discussed later in the chapter. While scheduling the development of a course, it may be noted that at least one semester’s time is necessary to develop one course by a trained developer combined with an experienced technician. A conservative approach is to combine one summer and the following semester as the scheduled to time to develop a course. The course development schedule and the ¿UVWWLPH FRXUVHRIIHULQJ VFKHGXOH VKRXOG EH FRRUGLQDWHG SURSHUO\ 6SHFL¿FDOO\ WKH\ VKRXOG EHFRRUGLQDWHGLQVXFKDZD\WKDWWKH¿UVWFRKRUW of students is able to take the courses as planned and graduate as planned. This constraint can put some strain both on the university and the students when it comes to electives. The university may be forced to develop many elective courses in a short time, and many students may be forced to take an elective course just because it is the only one being offered. When a course is developed, the usual practice is the university pays the developer a contracted amount of remuneration and the course becomes the property of the university. The university can then use either the developer or any other instructor to teach the course. This raises some important issues. A developer may not be willing to share the course material with another instructor interested in teaching the course. On the other hand, the potential instructor, who is not the developer, may not like to teach the course designed by another person. Another issue is the maintenance of course content. After a course is developed, any changes in the content must be consistent with preserving integrity of the content. One way to deal with this LVVXH LV WR KDYH D ³IDFXOW\LQFKDUJH´ IRU HDFK course, who may be the developer. This person has the authority over changes to the content. Sometimes, content change becomes mandatory, as in the case when the textbook goes to a new edition. In any case, a course should be updated

Developing and Delivering Online Courses

at least once in 5 years. In reality, most courses are updated once in 3 years. The university has to be aware of these issues and make them clear to the faculty. To ensure good quality of a course, a good practice is to have at least two faculty members involved in developing a core course. The reason is to have some kind of peer review. The team of developers can inspect each other’s work and offer constructive criticism. As in any academic product, peer review is the key to quality. Also, having more than one faculty member involved in WKHGHYHORSPHQWRIDFRXUVHRIIHUVWKHÀH[LELOLW\ in scheduling. For an elective course, whenever possible, more than one faculty member should be used to develop the course. Often this may not be possible, because only one faculty member may have the expertise in the specialized area. In such cases, the university may have an additional constraint to deal with while scheduling courses.

What is Expected of the Faculty The faculty developing online courses need to develop lectures using multimedia technology, systems facilitating online discussions and assignments, exams and projects appropriate for online mode of delivery. As online courses are inherently asynchronous in nature, it is important for a faculty delivering an online course to post alert messages regularly. It is a useful practice to urge students to access the course regularly and frequently. It is important to communicate with WKHVWXGHQWVWKDWDOWKRXJKWKH\KDYHWKHÀH[LELOLW\ to learn the material at any convenient time, the VWXGHQWVKDYHWRGRLWZLWKLQWKHVSHFL¿HGGHDGOLQH in order to keep up with the pace of class. Even though the online mode of delivery proYLGHVDIDFXOW\WKHÀH[LELOLW\WRLQWHUDFWZLWKVWXdents at any convenient time, a common practice is to set a reasonable time limit within which they can expect responses to their questions. Similar practice should be adopted by the faculty regarding

grading and returning of grades, and providing timely feedback to the students. It is useful to communicate such policies to the students very early in the course so that students have realistic expectations on receiving feedback. Group exercises could include assignments such as discussions on topic areas and research projects. Group exercises have a different dynamics in online courses. As the students do not have opportunity to interact with other students as readily as in an on-site mode of delivery, the faculty may have to form initial groups of students based RQ SUR¿OH LQIRUPDWLRQ RI WKH VWXGHQWV 6WXGHQW inputs/preferences can be taken into consideration in forming groups. Students may have clear preferences of group members, as they may have had the opportunity to develop working relationships with some of the students while participating in other online courses in the program. Participation in group-discussion assignments VKRXOGEHZLWKLQDFOHDUO\VSHFL¿HGWLPHZLQGRZ Real-time discussions tend to be problematic if the students are dispersed in different geographic locations. A faculty should monitor discussions periodically and provide feedback and guidance to make discussions meaningful. A faculty needs to develop assignments and exams for the course and make them available DWVSHFL¿HGWLPHVWKURXJKDVWDQGDUGL]HGPRGH of technology. The technology should facilitate DGPLQLVWHULQJRIWKHH[DPDWDVSHFL¿HGWLPH,Q addition, the technology should allow students to be able to complete their assignments and exams and submit them effectively. Finally, given the time and distance constraints on online delivery, the faculty has to take special care to maintain integrity of exams and assignments.

What is Expected of the Students In addition to the commonly required computer technology in education, students in an online course need to have easy access to Internet technologies. Students need to access the course Web

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Developing and Delivering Online Courses

site regularly and complete all course activities as required. Students have to pay special attention to observing deadlines, as deadlines have a different nature in online courses when compared to traditional onsite courses. For example, deadlines in an online course may not necessarily fall on a periodic basis similar to onsite courses, where deadlines commonly fall on a particular day(s) of the week throughout the semester. 7KHWLPHDQGORFDWLRQÀH[LELOLW\LQWKHOHDUQing process in an online course adds a level of complexity in managing group projects. Students have to make special efforts to work successfully LQJURXSV&RQÀLFWVPD\EHDORWKDUGHUWRPDQage in an online environment compared to onsite classes. Finally, students have to make a special effort to preserve the integrity of assignments and exams. This is especially important if the online courses do not require students to take their exams in a supervised environment. A weakness of online education is that cheating can be easier online than F2F. (This point is elaborated later in the next section.) Many universities require the students to sign an honor code.

Strengths and Weaknesses of Online Courses There are many strengths and weaknesses of online courses. Demirdjian (2002) provides a GHWDLOHGGHVFULSWLRQRIEHQH¿WVDQGGLVDGYDQWDJHV of online education. In this section, we provide a brief description of strengths and weaknesses from the standpoint of faculty and students. Strengths /HWXV¿UVWORRNDWWKHVWUHQJWKVIURPWKHVWDQGpoint of the instructors of online courses. The asynchronous nature of the delivery provides VLJQL¿FDQWÀH[LELOLW\SUHSDUDWLRQDQGGHOLYHU\ of the courses. The instructor has the ability to modify the course content, and carry out course

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activities, such as grading or monitoring discussions, at any time from anywhere. Curriculum control is easier with online than onsite courses, because the course content is very visible, and there is a complete record of what happened during the previous offering of a course. The instructor can study this record and SODQPRGL¿FDWLRQVWRWKHFRQWHQWRUWKHFRQGXFW RIWKHFRXUVHYHU\HI¿FLHQWO\2QVLWHFRXUVHVGR not have a record, and a mistake can recur easily. Continuous improvement is thus much easier with online courses than onsite courses. It is easy to enforce deadlines in online courses. Exams can be made available only during a particular time window. The online folders into which students submit their assignments and tests can be made to appear or disappear at predetermined times. A time stamp is automatically made on every submission. It is easy to track student participation in online courses. The instructor can select and view all the online activities of a particular student. The system can provide statistics such as how often a student logged on to the course Web site and how long he/she stayed online. Overall statistics, such as which day of the week the students are most active, can also be obtained, Such data can not only help with grading, but also can provide DEDVLVIRUFRXUVHPRGL¿FDWLRQV The quality of discussion can be enhanced VLJQL¿FDQWO\LQRQOLQHFRXUVHV,QDQRQOLQHGLVFXVsion, a student has more time to organize his/her thoughts, compose his/her messages, and post them at his/her convenience. It is also seen that this improves the writing skills of the students. In onsite classes, a student has only a limited amount of time to voice his/her opinion. At times, especially in the case of business managers, it is indeed desirable that a person is able to respond to a question on the spot. If such a skill is deemed necessary in an online class discussion, the format of the discussion can be changed from the usual bulletin board to online chat.

Developing and Delivering Online Courses

It is easy to have a guest lecture or a guest instructor in an online course. The guest can be anywhere physically and can communicate asynchronously. In other words, the guest is neither time bound nor place bound. A prominent guest FDQEHLQYLWHGWRDFODVVDWVLJQL¿FDQWO\UHGXFHG cost. If the guest agrees, the guest lecture can be repeated in the next offering of the course at no additional cost. Next, let us look at the strengths of online courses from the standpoint of the students. The DV\QFKURQRXVQDWXUHRIWKHFRXUVHSURYLGHVÀH[ibility and convenience to the students. Onsite classes tend to be rigid in the sense that students cannot continue with the program if they are required to change locations of their workplace. Online programs allow the students to move to different locations and still continue with the program. Many MBA students tend to travel on their job more often than other students. Thus, online courses are particularly suitable for MBA students. Although a course may have set tasks for every week, within a week the students have a lot of freedom. They can read or listen to a lecture DQ\ QXPEHU RI WLPHV EHFDXVH WKH OHFWXUH ¿OH is available online. In the F2F mode, students get only one chance to listen to a lecture in the FODVVURRP$QRQOLQHDXGLR¿OHFDQEHVWRSSHG DQGVWDUWHGRUHYHQ³UHZRXQG´DQGUHSOD\HGDQ\ number of times. 6WXGHQWVZLOO¿QGFODVVURRPGLVFXVVLRQVPRUH effecting online than F2F. In the F2F mode, students do not get enough time to think about the question and organize their thoughts. At the end of the class they might think of things that they should have said during the discussion. In an RQOLQHGLVFXVVLRQVWXGHQWVJHWVXI¿FLHQWWLPHWR assemble their thoughts and post them. They also get good practice in writing effectively. Administrators also gain several advantages. They can review, at any time during the course or at the end of the course, how well it is progress-

ing, or progressed, by reviewing all that has happened—discussions, quizzes, exercises, homework, and exams—during the course. Reviews RI))FRXUVHVLQWKLVPXFKGHWDLODUHGLI¿FXOW at best. Administrators can maintain uniformity of course content, irrespective of who is teaching the course, by maintaining the course content the same in all offerings of the course. Weaknesses Online courses have several inherent weaknesses. The most serious is the issue of preventing acaGHPLFGLVKRQHVW\RIWKHVWXGHQWV,WLVGLI¿FXOWWR check against cheating in exams and assignments. To mitigate this problem, some schools require the VWXGHQWVWRWDNHDWOHDVWWKH¿QDOH[DPDWDWHVW site so that the test can be proctored. However, this defeats the purpose of not having to be place and WLPHERXQG6RPHVWXGHQWVPD\¿QGLWGLI¿FXOW to go to the test site at an appointed time. In the case of assignments, because there will be too many of them in a course, it is not possible to ask the students to go to a site at an appointed time to complete an assignment. As mentioned in the previous section, some schools ask the students to sign an honor code to take care of this issue. A special kind of cheating is the availability of paper mills that sell term papers on any subject, for a fee. Instructors should actively guard against such cheating practices. Austin and Brown (2002) present a set of resources available to locate paper mills. Also, turnitin.com is a popular Web site for instructors in this regard. Online courses also result in reduced personal contact with other students and faculty in the course. A common complaint is that online education is dehumanizing. The asynchronous nature of the course delivery is the source of many strengths, and strangely, it is also a source RIRQHSDUWLFXODUZHDNQHVV,WPDNHVLWGLI¿FXOWWR enforce timely participation of students through timely intervention. It is easier to persuade and

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counsel a student in F2F courses than in online courses. As a result, the attrition rate in online programs is generally greater than those in F2F programs.

rapidly, and one should be in constant touch with the latest developments to keep oneself current.

REFERENCES CONCLUDING REMARKS Online education has emerged as the most successful form of distance education. It frees students from being place and time bound. It is estimated that, currently, there are more than 125,000 students enrolled in online MBA programs alone. Online education is thus a major form of e-business. This chapter provides some guidelines on starting an online degree program. Though not exhaustive, these guidelines cover most of the important aspects of online programs. The chapter covered several aspects of online program development, starting with how consonance with the mission is important. Under curriculum planning and curriculum control, several useful guidelines have been provided. Next, the importance of assurance of learning was pointed out. In the case of MBA program, some aspects of AACSB accreditation requirements were pointed out. These guidelines are transferable to other programs as well. The tasks of technical support were explained, both during course development and course offering. The need for marketing plans, and the costs involved, were noted. In the case of scheduling of course offerings, several parameters that affect the program administration were highlighted. Useful guidelines for course development were suggested. The attention then turned to faculty and student expectations, and strengths and weaknesses of online courses. Numerous strengths and some weaknesses of online mode of delivery were described. It is hoped that this coverage is helpful to those who are planning the development of an online program. It should also be noted that online education is advancing in scope and technology

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Austin, M., & Brown, L. (2002). Internet plagiarism: Developing strategies to curb student academic dishonesty. In L. Foster, B. Bower, & L. Watson (Eds.), Distance education: Teaching and learning in higher education (pp. 258-267). Boston: Pearson Custom Publishing. Blake, C., Gibson, J. W., & Blackwell, C. W. (2005). What you need to know about the web. SuperVision, 66(9), 3-7. Bloom, B. S. (1984). Taxonomy of educational objectives. Boston: Allyn and Bacon. Boettcher, J. (2002). How much does it cost to put a course online? It all depends. In L. Foster, B. Bower, & L. Watson, (Eds.), Distance education: Teaching and learning in higher education (pp. 258-267). Boston: Pearson Custom Publishing. Bryant, S. M., Kahle, J. B., & Schafer, B. A. (2005). Distance education: A review of the contemporary literature. Issues in Accounting Education, 20, (3), 255-272. Crawford, K. (2005). A degree of respect for online MBAs Web-based programs lack Ivy prestige, but they can boost aspiring executives’ fortunes. Business 2.0, 6(11), 102-103. Demirdjian, Z. S. (2002). The virtual university: Is it a panacea or a Pandora’s box? Journal of American Academy of Business, 1(2), 172-178. Folkers D. A. (2005). Competing in the marketspace: Incorporating online education into higher education - An organizational perspective. Information Resources Management Journal , 18(1), 61-77. Gronlund, N. E. (2005). Assessment of student achievement. Boston: Allyn and Bacon, Inc.

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+ROVDSSOH&: /HH3RVW$ 'H¿QLQJ and promoting e-learning success: An information systems perspective. Decision Sciences Journal of Innovative Education, I, (1), 67-85. Marks, R. B., Sibley, S. D., & Arbaugh, J. B. (2005). A structural equation model of predictors for effective online learning. Journal of Management Education, 29, (4), 531-563. Palomba, C. A., & Banta, T. (1999). Assessment essentials: Planning, implementing, and improv-

ing sssessment in higher rducation. New York: John Wiley & Sons, Inc. Suskie, L. (2004). Assessing student learning: A common sense guide. Boston: Anker Publishing Company, Inc. Walvoord, B. E. (2004). Assessment clear and simple: A practical guide for institutions, departments, and general education. New York: John Wiley & Sons, Inc.

This work was previously published in E-Business Process Management: Technologies and Solutions, edited by J. Sounderpandan and T. Sinha, pp. 231-249, copyright 2007 by IGI Publishing (an imprint of IGI Global).

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Chapter 2.20

Developing an Online Fleet Management Service: AlertDriving.com Ron Craig Wilfrid Laurier University, Canada Detlev Nitsch Wilfrid Laurier University, Canada

EXECUTIVE SUMMARY

ORGANIZATIONAL BACKGROUND

This case illustrates the new generation of ebusiness ventures made possible by the Internet and enabling information and communication technologies. AlertDriving is a recent Canadian start-up, which has moved through the microbusiness to the small business stage, and aims for continued growth. First-to-market with a WebEDVHGGULYHUWUDLQLQJDQGÀHHWULVNPDQDJHPHQW service, the business combines e-learning, risk management, and e-business. Their new approach replaces traditional methods of classroom and behind-the-wheel driver training and paper-based ÀHHWPDQDJHPHQWV\VWHPV*URZWKKDVEURXJKW ERWKRSSRUWXQLWLHVDQGFKDOOHQJHVWRWKH¿UPDQG its two entrepreneurs/brothers. In particular, they face important decisions concerning continuing WRJURZUHYHQXHDQGSUR¿W

Incorporated in 2001 by the Martin brothers (Gerry and Rob), AlertDriving’s roots went back almost two decades. Gerry was a mid-1980s business graduate from Wilfrid Laurier University in Waterloo, Ontario. During his undergraduate days, he noticed the increasing interest in allterrain vehicles and started importing more aggressive off-road tires for them. This was a small, SUR¿WDEOHVLGHOLQHIRUKLPXQWLOWKHJURZWKLQRII URDGYHKLFOHVOHGODUJHU¿UPVDQGUHWDLOHUVWRHQWHU the business. Following graduation he took a sales and marketing position with Procter and Gamble (a large multinational engaged in the manufacture and marketing of various consumer products). Procter and Gamble had a rigorous training and development program, in which Gerry thrived. His brother, Rob, had his eyes set on a National

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Developing an Online Fleet Management Service

Hockey League professional career, having been drafted by the Ottawa 67s (a Major Junior A team). However, injuries forced him to leave ice hockey, and he founded a property development and renovation business in Toronto. A few years later, Gerry left Procter and Gamble to join his EURWKHUDQGWKH\UDQWKLVEXVLQHVVSUR¿WDEO\IRU several years. With Gerry’s sales background and the brothers’ entrepreneurial aspirations, they saw an opportunity in the motivational and sales tape area. Sonic Sales Aids was launched to develop and distribute a series of such tapes for sales personnel. Their customers preferred these lesson tapes WREH¿OOHGRQRQHVLGHRQO\DQG*HUU\FDPHXS with the idea of putting driving tips on the other VLGH(YHQWXDOO\WKHEURWKHUVEHFDPHGLVVDWLV¿HG ZLWKWKHUHDOHVWDWHEXVLQHVV:KLOHSUR¿WDEOHLW required unrelenting hard work, and there was little opportunity to build a bigger business. And DOWKRXJK6RQLFZDVSUR¿WDEOHLWVHUYHGDQLFKH market with little growth potential. With this background, the brothers started DV\VWHPDWLFVHDUFKIRU³VRPHWKLQJEHWWHU´²D venture that would satisfy their entrepreneurial aspirations and personal goals. Gerry and Rob VWDUWHGSXWWLQJDVLGHWLPHHYHU\ZHHNHQGWRGH¿QH their search criteria, to consider potential busiQHVVHVDQG¿QDOO\WRH[DPLQHWKHPRVWSURPLVLQJ possibilities in greater detail. It was a disciplined approach, taking some three years before they put together the concept for AlertDriving. Gerry remembered those years: One of the key things for us was the fact that we saw all of our past business experiences as stepping stones or building blocks that would help us be successful – we sensed right from the beginning that it was vital to incorporate what we’d learned from past successes and failures into our new venture. Each experience has taught us something about what it takes to be a successful entrepreneur.1

It was the emergence of streaming video technology that caught their attention. They saw the potential for developing much better driver training aids, delivering the system over the Internet at a vastly reduced cost to in-car or in-class training, and giving participants the opportunity to choose the time and place of training. It was as if a light had gone off in Gerry’s head. This was going to be revolutionary. Rob immediately went out and bought the hardware and software, which we set up in his apartment. It FRVWXVDERXW7KHQZHKDGWR¿JXUHRXW how to use it. Neither brother had much of an IT background, but they quickly found someone who was interested in working with them on such new and H[FLWLQJ WHFKQRORJ\ 'XULQJ WKHLU ¿UVW \HDU RI operation, a crude prototype was developed and tested locally. True to their sales background, WKH\VLPSO\³FROGFDOOHG´DIHZEXVLQHVVHVDQG found seven willing to look at their prototype and provide comment. Based on this feedback, they felt they had a winner. It would take much more HIIRUWDQGFRVWWRGHYHORSWKH¿QDOSURGXFWEXW WKLVZDVGH¿QLWHO\VRPHWKLQJWKDW¿UPVZRXOG seriously consider purchasing. The brothers decided they would sink their personal savings into the venture. An immediate concern was whether to go solely with their original idea of online driver WUDLQLQJDULÀHDSSURDFK RUKHGJHWKHLUEHWZLWK several other online training programs (a shotgun approach). The brothers felt they needed to focus on what they knew best and were concerned WKDWWKHLUOLPLWHGUHVRXUFHVZHUHLQVXI¿FLHQWWR tackle other training areas. Yet trusted advisers, with much more business experience than they had, counseled them to consider a range of offerings. For example, there were proven markets for training in hazardous material handling and

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workplace safety. In hindsight, the brothers were happy they stuck with their intuition and ignored this advice. We felt then that a proliferation of products would spread our start-up resources much too thin. So we decided, against the advice of our advisors, to FRQFHQWUDWHRQWUDI¿FVDIHW\DORQH/RRNLQJEDFN we see this decision as critical to the company’s early survival and subsequent success. Taking this focus one step further, they decided to initially provide training for drivers of passenger vehicles only (such as sales people, managers, and others). They would not consider the massive trucking market, as truck drivers (at that time) were less comfortable with computers and much less likely to have Internet access. It took a year for the product to be brought to launch status. Lesson scripts needed to be developed, driving situations videotaped, voices added to the lessons, and quizzes developed. Also, the basic delivery structure, utilizing the Web, had to be put in place. AlertDriving’s Web site was developed to provide information about the company and its products, to allow testing of a sample lesson, and to provide access to training modules for customer employees. $VDQHZSOD\HULQWKHGULYHUWUDLQLQJDQGÀHHW risk management business, AlertDriving needed to establish credibility. One way they did this was E\ HQOLVWLQJ 7UDI¿F 6DIHW\ 0DUVKDOV ² SHRSOH with considerable experience as provincial police, VWDWHWURRSHUVRUFLW\WUDI¿FRI¿FHUV7KHVHSHRSOH provided advice on the initial product and allowed AlertDriving to boast about their hundreds of years of experience. Over time, the role of these TSMs migrated to services concerning accident investigation and reconstruction. They were paid RQDIHHEDVHGEDVLVVRSURYLGHGVLJQL¿FDQWYDOXH during the start-up phase, at relatively low cost. In high tech marketing, the concept of the ³ZKROH SURGXFW´ LV ZHOO HVWDEOLVKHG 0RRUH

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1999). Most potential customers are looking for one-stop shopping, and a compelling reason to buy comes when the entire package (the product/ service, training in use of it, after-sales support, etc.) is made available. As Rob and Gerry Martin talked further with potential customers and developed the initial training series, they developed a better understanding of what AlertDriving’s ZKROHSURGXFWVKRXOGEH7KH\IRXQGWKDWÀHHW managers routinely checked the driver license records of potential drivers and sometimes the records of current employees. All aspects of a SHUVRQ¶VGULYLQJUHFRUGVSHHGLQJWLFNHWVWUDI¿F infringements, accidents, etc.) were available. However, it wasn’t always easy to do this. The brothers observed that a quick, user-friendly means of accessing an individual’s MVR (motor YHKLFOHUHFRUG ZRXOGPDNHOLIHHDVLHUIRUÀHHW PDQDJHUV6RWKH\HYDOXDWHGVHYHUDO¿UPVWKDW provided access to such records and teamed up with First Advantage Corporation, a Florida-based EDFNJURXQGFKHFNLQJ ¿UP 7KH $OHUW'ULYLQJ Web site was developed to interface with First Advantage’s database. While the margin on this business was low, it was a natural complement to AlertDriving’s training product (which had much higher margins). In April 2000, AlertDriving had its next major test at the National Association of Fleet Administrator’s (NAFA) tradeshow. With an entry fee of US$15,000 (equivalent at the time to some $23,000 Cdn), it was an agonizing decision. Gerry and Rob decided this was the best time and place to showcase their new product. So they put their marketing experience into high gear by preparing an extensive preshow direct mailing and telemarketing campaign. Results were very positive — their booth was always busy and WKH\VLJQHGXSWKHLU¿UVWFXVWRPHU&XPEHUODQG Farms, operator of a U.S. gas and convenience store chain). In addition, they came back with a long list of prospects. Again drawing on their marketing experience, they hired telemarketers

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to contact everyone on the prospect list, gauge their level of interest, and encourage them to look at www.alertdriving.com. Rob and Gerry then spent time following up on the more promising prospects and Gerry worked on closing the GHDOV7KHHQWLUHF\FOH¿UVWFRQWDFWWRVLJQLQJD contract) was usually several months, and it took FRQVLGHUDEOHHIIRUW,QJHQHUDOPRVW¿UPVZHUH quite reluctant to seriously consider this innovative approach to driver training, but there were SURJUHVVLYH¿UPVZKRXQGHUVWRRGWKHDGYDQWDJHV and cost savings. AlertDriving also started using Web site data to observe which potential clients were coming to the Web site, how long they stayed, what they looked at, and which test modules they tried. This provided leads for them to pursue. Once we knew who was looking at our Web site and testing the sample modules, we knew who to follow up with. We’d call them and ask if they’d had a chance to look at our material, knowing full well they had already worked through it. We didn’t bother with people who came in and only stayed a minute or two. Gradually, it became clear that negligent entrustPHQWZDVDPDMRUFRQFHUQIRU86ÀHHWRSHUDWRUV People injured, or simply involved, in an accident ZLWKVRPHRQHGULYLQJDÀHHWYHKLFOHFRXOGVXHWKH company owning the vehicle. The lawsuit would be based on the argument that the company had not exercised due diligence in hiring the vehicle operator and properly training the driver. Courts FRXOGPDNHDZDUGVLQWKHVHYHQ¿JXUHUDQJHZLWK the largest judgment coming in at US$48 million. Fleet managers needed to show that due diligence had been pursued in selecting drivers, monitoring their driving record, and ensuring that they took appropriate driver training. Besides mitigating the risk of negligent entrustment, there were direct savings available to customers. Driving records affected insurance pre-

PLXPVDOWKRXJKODUJHU¿UPVRIWHQVHOILQVXUHG AlertDriving used this to show how successful driver training not only paid for itself, but resulted LQRYHUDOOVDYLQJVIRU¿UPV$OOÀHHWPDQDJHUVKDG to do was use the services on the AlertDriving Web site, which kept records of everything done E\WKHÀHHWPDQDJHUDQGWKHGULYHUV In 2001, the company incorporated. Originally operating under Sonic Sales Aids (the old business), the name AlertDriving.com now became prominent. Growth continued, with an operating GLYLVLRQRIDPDMRUSKDUPDFHXWLFDO¿UPLQLWLDWLQJ a pilot program for 700 of their drivers. This led to an expanded program for the division’s entire ÀHHW WKH IROORZLQJ \HDU IROORZHG D \HDU ODWHU by a contract for all its North American drivers (some 13,000). AlertDriving found that more and more large clients (and prospective clients) were investing millions of dollars in their own Learning Management Systems (LMS) to manage their corporate training needs. Once this trend became apparent to the Martin brothers, they moved quickly to take the necessary steps to ensure their driver training programs were compliant with AICC and SCORM,2 the industry standards governing the delivery, tracking, and reporting of Web-based training material in North America. AlertDriving earned the distinction of being WKHRQO\'RFHQWFHUWL¿HGFRQWUDFWRUVXSSO\LQJ RQOLQH ÀHHW ULVN PDQDJHPHQW SURJUDPV 7KLV ZDVDVLJQL¿FDQWFRPSHWLWLYHDGYDQWDJHEHFDXVH Docent was the largest LMS software provider to AlertDriving’s Fortune 1000 target market. By 2004, AlertDriving had expanded their product line further. Their driver training programs were now available for drivers of light duty pickup trucks, as well as 15-passenger vans. Other services were also provided (see Appendix A for a complete list, as of December 2005). While AlertDriving was based in Canada, sales were almost exclusively in the USA. One reason was the greater concern about lawsuits. Another was

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that American companies were more aggressive in seeking savings and were more comfortable with new technology. Timmons and Spinelli (2004) discuss the balancing act a growing business must walk. Sometimes referred to as a three-legged stool, their model of the entrepreneurial process is shown in $SSHQGL[%$OHUW'ULYLQJ¿WVWKLVPRGHOZHOO both in terms of meeting many key questions associated with each of the three major components and in terms of the ups and downs a new venture faces as it establishes itself.

SETTING THE STAGE The Internet has changed the way many small businesses operate and provided opportunities for creating new types and forms of business. AlertDriving.com is a recent Canadian e-business start-up that utilizes the Web and information technology to meet customer needs in a new, innovative manner. Using e-learning and e-business DVDPHDQVRIRYHUFRPLQJVLJQL¿FDQWHQWU\EDUULHUV LQDQHVWDEOLVKHGLQGXVWU\3RUWHU WKH¿UP has developed a solid foothold in a traditional industry. Furthermore, their product/service line has expanded as they moved driving training and ÀHHWULVNPDQDJHPHQWIURPWKHSK\VLFDOWRWKH virtual value chain (Rayport & Sviokla, 1995). AlertDriving’s Web site (www.alertdriving.com) SURYLGHVDQLQWURGXFWLRQWRWKH¿UPVHH$SSHQGL[ C) and their services (see Appendix A). AlertDriving has taken advantage of new learning delivery methods available through the Internet. E-learning is a rapidly growing market, replacing traditional classroom education and training in our knowledge economy (Brockbank, 2002; Nagy, 2004). AlertDriving has focused on DYHU\QDUURZQLFKHZLWKLQWKLVEURDG¿HOGHVWLmated at a market potential of US$600 million for the North American market. Yet their approach is WUDQVIHUDEOHWRRWKHUWUDLQLQJDQGOHDUQLQJ¿HOGV

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providing a potential means of entry into a much larger market. $OHUW'ULYLQJRSHUDWHVZLWKLQWKHÀHHWPDQDJHment services sector. Fleet management refers to the discipline of tracking, maintaining, and otherwise managLQJ D ÀHHW RI YHKLFOHV LQ DQ RUJDQL]HG PDQner. In most cases, fleet management software is relied upon to accomplish this task. Fleet management software offers a number of useful features. It can be used to schedule Preventive Maintenance (PM) and inspections, automatically generate fuel, mileage, tire, and trip logs, organize all contact information on drivers, employees, and customers, track all details on each DFFLGHQWFODLPWUDI¿F YLRODWLRQ PDQDJH SDUWV inventory and automatically generate and print ZRUNRUGHUV(QWHUSULVHOHYHOÀHHWPDQDJHPHQW VRIWZDUHVKRXOGRIIHUDVHWRIÀH[LEOHZHEEDVHG reporting tools, and in general will be highly customizable to any vehicle environment.3 :RUOGZLGH ÀHHW PDQDJHPHQW LV D PDWXUH business sector, with several large, well-established and integrated competitors. Traditionally DKDQGVRQ³ORZWHFK´DSSURDFKKDVEHHQWDNHQ 7KHÀHHWVHFWRUFDQEHVHJPHQWHGE\W\SHRIYHhicle (car, SUV, passenger van, cargo van, truck (further segmented by GVW), equipment, offroad, etc.) and type of organization (commercial, QRWIRUSUR¿WJRYHUQPHQWODZHQIRUFHPHQWDQG emergency, etc.). Fleets are further segmented by size (5000 vehicles). Organizations will have one or more ÀHHWPDQDJHUVRYHUVHHLQJWKHLUÀHHWRSHUDWLRQV and managing the associated risk. While the move E\PDQ\¿UPVWRIRFXVRQFRUHFRPSHWHQFLHVDQG outsource the context (Moore, 2003) is relatively UHFHQWRXWVRXUFLQJRISDUWVRIÀHHWPDQDJHPHQW has been common for several decades (e.g., leasing DQG¿QDQFLQJ 7RGD\PDMRUÀHHWPDQDJHPHQW

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VHUYLFH ¿UPV SURYLGH VXFK VHUYLFHV DV YHKLFOH OHDVLQJÀHHWSROLF\DQDO\VLVDQGUHFRPPHQGDtions, benchmarking, vehicle recommendations, ordering and purchasing vehicles, arranging for vehicle delivery and administration of the title and registration process, tax and insurance requirements, pursuing warranty claims and remarketing used vehicles, fuel management, maintenance management, road assistance, periodic inspection, accident services, driver training, and driver SUR¿OLQJ

CASE DESCRIPTION As of 2005, AlertDriving had a proven value proposition for current and prospective customHUVDQGDQHVWDEOLVKHGSUHVHQFHLQWKHÀHHWULVN PDQDJHPHQW¿HOG:KLOHWKH\PD\KDYHHVFDSHG notice by major competitors in the past, this is no longer the case. Having proved the viability for applying e-learning to this market segment, WKH\H[SHFWHGWRVHHRWKHU¿UPVWDNLQJDVLPLODU approach. Indeed, this has already happened, although the competition could not match the current quality and capability of AlertDriving’s products. Appendix D lists many of the major competitors, along with other sources of information. AlertDriving’s customers had three reasons IRULQYHVWLQJLQWUDI¿FVDIHW\PDQDJHPHQWSURgrams. Negligent entrustment suits were on the increase and organizations needed to show they had exercised due diligence. Insurance companies PRQLWRUWKHLUFOLHQWVDQGJRDIWHU¿UPVZLWKKLJKHU than average claims records — either increasing their rates or dropping them. Finally, for selfLQVXUHG¿UPVWKHFRVWRIDFFLGHQWVFODLPVORVW WLPHUHSDLUVHWF FDQEHUHGXFHGVLJQL¿FDQWO\ through proper driver selection and training. U.S. National Safety Council data show that businesses directly spend about $60 billion annually on traf¿F FROOLVLRQV DQG H[SHULHQFH DOPRVW  PLOOLRQ lost workdays.

The customer value proposition comprised three components: (1) a one-stop Web-based traf¿FVDIHW\PDQDJHPHQWSURJUDP DQHOHDUQing driver training program available anytime, DQ\SODFH YLD WKH ,QWHUQHW  DQG   VLJQL¿FDQW cost savings compared to behind-the-wheel or classroom training. Appendix A lists AlertDriving’s products DQG VHUYLFHV DQG WKHLU :HE VLWH EULHÀ\ GHscribes each. Internet-based learning accounted for approximately 75% of AlertDriving’s 2004 revenues. Another 20% of revenues came from vehicle record checks and the Motor Vehicle Record checks program. Other products and services accounted for the remaining 5%. Gerry estimated AlertDriving’s share of their segment at 80% to 90%. Most of AlertDriving’s revenues came from the U.S. market, but by the end of 2004, expansion to Europe was contemplated. As of early 2005, AlertDriving planned to have their Internet products available in 12 languages within a year. Unlike some of their competitors, they would not simply use translated voice-over versions of the North American product to penetrate this market. Instead, they would create a new, customized package from the ground up. This represented a substantial undertaking, since it included location ¿OPLQJLQWKHWDUJHWFRXQWU\HQVXULQJWKDWFRXQWU\VSHFL¿FGULYLQJUHJXODWLRQVZHUHDFFXUDWHO\ presented, incorporating information from current local driving manuals, and using a native speaker to record all voice-over material. Dealing with the language portion alone was estimated to cost some $15,000 to $20,000, with the overall cost to offer four to six modules in each of 12 countries UHDFKLQJVL[¿JXUHV Expansion to Asia was not currently contemplated because there were many more languages, Internet penetration was much lower than North America and Europe, and Gerry perceived that scooters, not automobiles, were the dominant form of motorized personal transportation. In

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addition, the legal environment governing traf¿FVDIHW\LVVXHVZDVXQIDPLOLDUWRWKHEURWKHUV *HUU\VDLG³:HMXVWGRQ¶WNQRZKRZWRGR$VLD at this time.”

$VDVPDOOHQWUHSUHQHXULDO¿UP$OHUW'ULYLQJ had a strong bias for action. While an organizational structure existed, everyone was more interested in producing results than simply looking after their particular job area. One employee said:

HUMAN RESOURCES AND ORGANIZATIONAL STRUCTURE

Nobody’s too proud to do anything around here. I’ve seen Gerry and Rob pick up a broom and empty the garbage when it had to be done, and unlike my previous job in a highly bureaucratized organization, formal job titles are almost irrelevant. My own title varies with the hour. I’m supposed to be an Admin Team Leader, which means I’m responsible for helping the administrators in our FOLHQW¿UPV¿JXUHRXWKRZWRUXQRXUSURJUDP But I also answer the phone, support sales and act as a receptionist. When something new comes up, everyone gets involved, which means we all grow and learn together.

AlertDriving continued to be a lean organization. Additional employees had been hired only as necessary and as the company could afford them. In the early days, there was no formal organizational structure and there were few employees. Over time, more employees were added, and by mid 2005 there were 21 in total (including one co-op student). Appendix E shows the company’s organizational chart. Finding the right people, and keeping them, KDVEHHQGLI¿FXOWDWWLPHV*HUU\VDLG We put a lot of emphasis on the hiring process now that we’ve come to the realization that we made a few poor choices along the way. Some of our hiring decisions proved to be extremely disruptive and costly to the company. The new focus on getting the right people has helped, but we still need to be a lot better at attracting, hiring, and training new personnel. Training new employees was equally challenging, especially in the sales area. It could take six months or more to get someone up to speed. Gerry provided a recent example: On the job training is often not the best approach but practical considerations tend to dictate that’s what must happen. Recently Rob and I had to put a large amount of time and energy into training two new salespeople on our products and the market. We worked very hard to get them comfortable and knowledgeable so they could stop being a drain on our limited resources and start to contribute to sales and to the bottom line.

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This bias for action and focus on results, plus the leading edge nature of the products, was especially attractive to young IT graduates. AlertDriving was able to offer greater challenge and opportunity to recent grads than most other ¿UPV6RZKLOHWKH\ZHUHXQDEOHWROXUHQHZ,7 staff with higher wages and stock options, they were able to offer comparable wages along with an exciting work environment.

FINANCES Up to the current time, AlertDriving has been ¿QDQFHG PDLQO\ E\ WKH 0DUWLQ EURWKHUV DQG PRUHUHFHQWO\IURPLQWHUQDOFDVKÀRZ1RZWKDW $OHUW'ULYLQJZDVVKRZLQJDSUR¿WPRUH¿QDQFLDO resources were available for product development and market expansion. Yet the brothers continued WR EH ZDU\ RI H[WHUQDO ¿QDQFLQJ SUHIHUULQJ WR continue their bootstrapping approach. On the other hand, Gerry now wondered if their conserYDWLYHDSSURDFKWR¿QDQFLQJPD\EHKDPSHULQJ growth of the business.

Developing an Online Fleet Management Service

5HO\LQJRQIUHHFDVKÀRZOLPLWVRXUDELOLW\WRDGG staff, which in turn has a negative impact on our capacity to develop new products and grow our top line. We need to consider our options to overcome this situation without giving away the farm. Appendix F shows a common size historical income statement for the past four years (the company prefers not to disclose actual sales and H[SHQVH¿JXUHV 

WKH\¿UVWORJLQDQGYLHZWKHGHPRDQDFFRXQW manager calls to determine their level of interest and qualify them while obtaining their feedback. Although we already know they’ve looked at the demo we ask them if they’ve had a chance to check it out because it gets the conversation going, and may even give us the opportunity to answer any questions that the prospect may have. Our goal is to get them to agree to have a free pilot program VRWKH\FDQUHDOO\HYDOXDWHLWDQGVHHWKHEHQH¿WV for themselves. The conversion rate on pilots is very high.

MARKETING AND SALES Gerry and Rob took a very systematic approach to customer prospecting, making their pitch and closing the sale. It was both labor and time inWHQVLYHDQGLWKDGSURYHQLWVHOIRYHUWKHSDVW¿YH years. Today, clients included many Fortune 50 companies, state governments, universities, and even churches (for 15-passenger van courses). AlertDriving’s customer retention rate approached 100% and their user satisfaction measures continued to be very high. Gerry felt their focus on systematic and structured sales techniques was a competitive advantage in the industry. It included such detail as always sending a thank you note to a prospective customer immediately after a sales presentation (and before leaving the customer’s city). One of the account managers provided an overview of the current sales process: )LUVW5RESURYLGHVDFDOOOLVWRIÀHHWULVNDQGVDIHW\ professionals that he generates using information from the various industry associations that AlertDriving has joined. This list is passed on to our telemarketing people, who contact the prospects and ask if they’d be interested in having the demo link to our sample training program e-mailed to them, so they can play around with it. The on-line activity of these demo trials is monitored using our Web site tracking tools. The business day after

Alternatively, if the prospect does not log in within two weeks, our system automatically sends them a reminder e-mail with their username and password to access the demo. This happens every week until the prospect either logs in or requests to be removed from the demo reminder list. The automated reminder is essentially a silent salesperson that has proven to be extremely effective at getting our training in front of a large number of prospects. 5HÀHFWLQJ EDFN RQ WKH GHYHORSPHQW RI WKLV approach and its importance, Gerry acknowledged: In the beginning it was easy to concentrate on the sales process since there were no clients to service. However, as our customer list grew some of our selling efforts were diverted away from lead generation, prospect-qualifying, and closing new business to ongoing account management. But given the length of our sales cycle, the upstream end of the pipeline is critical to our continued success. Consequently, at the beginning of 2005 we rededicated ourselves to our successful prospecting system. To support this initiative, AlertDriving hired WKHLU¿UVWLQVLGHVDOHVSHUVRQ+LVMREZDVWRFXOWLvate relationships with prospects before handing

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them over to the outside sales team. His other assignment was to build relationships with existing clients to ensure annual repeat business.

INFORMATION TECHNOLOGY Information and communication technology (ICT) has played a pivotal role in the development of AlertDriving. While not an entirely virtual company, they had many characteristics of one. As a Web-based e-learning business, technology remained crucial to both running and growing the company. Much of their marketing and administration relied upon various software applications. Consequently, their Technology Group was large, second in size only to Sales. At start-up, AlertDriving had a single developer. Now there were six people, including four developers. Additional hires were planned. AlertDriving’s initial software platform evolved over a period of years, with new applications appended from time to time. This led to an unstructured, dated system that was LQFUHDVLQJO\GLI¿FXOWWRH[SDQGRUWRFXVWRPL]H for client needs. Consequently, in late 2004, a complete redevelopment was undertaken. Termed DIIHFWLRQDWHO\ DV WKHLU ³$ERPE´ SURMHFW WKLV was to provide a springboard for future growth, enable AlertDriving’s global initiative, and provide clients with more customization ability. A developer explained: 2XUSDVWRQHVL]H¿WVDOODSSURDFKGRHVQ¶WZRUN anymore. Customers want customization. While we now do this through hard coding, the new platform will have a sophisticated “plug ‘n play” preference system, allowing customers to select the look, feel, and features they want. $VLGHEHQH¿WRIWKLVFDSDFLW\WRFXVWRPL]H was the potential for customer lock-in, making it less attractive for customers to move to another

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competitor. If switching costs, or at least perceived switching costs, became high, there would be little incentive for a customer to leave, as long as current costs and services were not excessively different from a competitor’s. As AlertDriving matured, a more systematic approach to IT projects developed. Standards and best practices were introduced to software development. Where once the approach was to start coding and then go back to add additional IHDWXUHVRU¿[DQDSSURDFKWKDWZDVQRWZRUNLQJ well, now a formal development process was in place. Industry practices were followed for both IT project planning and management. This was paying off in terms of product quality and delivered functionality, and projects were much more likely to be completed on time and on budget. From start-up, the company went with common system and application software. As much as possible, open source software was used (e.g., Linux,4 PHP,5 CVS,6 and MySQL7). Initially, the reason for going the open source route was solely to save money. However, these products were found to be robust, with improvements regularly forthcoming. Their operating system was Redhat Enterprise Linux, so there was the EHQH¿WRIUHJXODULPSURYHPHQWVIURPWKHRSHQ source development community, along with the security and other enhancements and ongoing technical support provided by Redhat. MySQL suited AlertDriving’s needs, and they had no plans to replace it anytime soon with any larger, much more expensive proprietary database management system such as Oracle or DB2. The business would KDYHWRJURZE\RUGHUVRIPDJQLWXGH¿UVW On the hardware side, AlertDriving was lean. Everyone had the ubiquitous desktop microcomputer (with more powerful platforms for their Technology Group). Web site and other development work was done on an off-line in-house server. This had several advantages. First, developers were not delayed by a slow Internet connection. Second, the system was physically isolated and hence

Developing an Online Fleet Management Service

secure from external attack. Third, it prevented WKHEDGSUDFWLFHRIPDNLQJFKDQJHV³RQWKHÀ\´ to the live production system. Finally, installing and maintaining development tools (such as the volume control system) was much more easily handled on site. Rather than host and maintain their own Web site server, they outsourced this to IBM. Under the arrangement, AlertDriving paid a ¿[HG PRQWKO\ IHH IRU D EDVH OHYHO EDQGZLGWK service, plus an additional variable amount for DQ\:HEWUDI¿FYROXPHPHDVXUHGLQJLJDE\WHV per second) that exceeded this base.8 The pricing was such that it was in AlertDriving’s interest to periodically adjust the base level upward as the average monthly demand increased. Yet they did not have to forecast and pay for potential demand peaks that were subsequently not needed. This was important, as there were usually sudden, large increases in Web site demand whenever a new client was signed up – typically many of WKHFOLHQW¶VHPSOR\HHVZDQWHGWR³FKHFNRXW´WKH Web site. After a few days demand leveled off to a new steady state point. Applications developed by the Technology *URXSSURYLGHGRSHUDWLRQDOHI¿FLHQFLHVIRUWKH administrative side of the company. AlertDriving needed no full-time accounting department with an account receivables clerk, as client billing was done automatically each month using a Web-based system. While minimizing the amount of effort UHTXLUHGLQWKHRI¿FHWKLVV\VWHPZDVDOVRDSpreciated by customers, many of whom preferred (or even required) EDI or Web-based billing. So this billing system also provided competitive advantage over competitors without such capabiliWLHV$QRWKHUDGPLQLVWUDWLYHHI¿FLHQF\FDPHIURP outsourcing the payroll work to Ceridian. Sales and marketing relied on another important application – the lead tracking system. Sales used this to see who visited the Web site, how long they stayed, and what pages they looked at (as described previously in this case by an account manager). Knowing which prospects had viewed

the Web site, and which, if any, demos they tested, sales personnel knew with whom to concentrate their sales efforts. AlertDriving did not believe any of their competitors had such a sales tool in place yet. And there were other custom applications used by sales to assist in managing an ever increasing customer list. Still other applications had been developed by the Technology Group for their own use. The new client setup process, which used to require extensive personal effort, had been streamlined. Now standard scripts were run, with particular options enabled. Compared to the past, the time requirement now was small. Of great assistance was the Incidence Log used for technical support. This was a database of past customer problems and solutions, along with a user tool set. Quickly searchable, a Help Desk person could immediately identify whether or not a particular problem had KDSSHQHGEHIRUHDQGLIVRZKDWZDVGRQHWR¿[ it. New problems and solutions were added as they occurred. Overall, with the improvements in application design and practice, there were fewer customer launch problems and less maintenance of applications. And with the Incident Log, not RQO\FRXOGPRVWSUREOHPVEHTXLFNO\¿[HGEXW IUHTXHQWFOLHQWSUREOHPVZHUHLGHQWL¿HGDQGVXEsequent improvements made to the system. While the number of IT employees continued to grow, this was in decreasing proportion to the increase in sales and number of clients supported.

CURRENT CHALLENGES/ PROBLEMS FACING THE ORGANIZATION Wanting to continue the growth rate of their ¿UPWKH0DUWLQEURWKHUVIDFHGERWKH[WHUQDODQG internal challenges. They felt AlertDriving was clearly the leader in Web-based driver training DQGÀHHWULVNPDQDJHPHQWV@LPXODWLRQ also is relatively easy to understand, offers a controlled experiment, compresses time, and serves as a mode for training decision makers” (p. 856).

Simulation, in general, is an experimental device. $PRGHOZKLFKLV³DVLPSOL¿HGUHSUHVHQWDWLRQ or abstraction of reality” (Turban & Aronson, 1998, p. 38) is the vehicle for simulation (Pidd, 1998). In practice, according to Forgionne (1999), different types of models (e.g., physical models, analog models, and quantitative models) can be XVHGIRUVLPXODWLRQSXUSRVHVDQG³>L@QLWVLQLWLDO IRUP WKH PRGHO LGHQWL¿HV WKH NH\ HOHPHQWV RI the problem and their interrelationships” (p. 859). The simulation outcome depends on the inputs DQGWKHZD\WKHLQSXWVDUHUHODWHGDQGVSHFL¿HG through a model. 1D\ORU SXUSRUWVWKDW³>Z@LWKFRPSXWHU simulation, there are virtually no limitations placed on the type of model structure that may be XWLOL]HG´DQGKHXVHV³VLPXOWDQHRXVVWRFKDVWLF difference equations” to illustrate the notion of simulation (p. 18). As pointed out by Pritsker (1998), equations can be used to construct simu-

711

Econometric Simulation for E-Business Strategy Evaluation

lation models. Econometric models, as a type of quantitative model and represented by one equation or a set of equations, can identify the major problem elements and their relationships empirically and, thus, can represent the mechanisms of HEXVLQHVVVWUDWHJLHV6XFKDZD\RI³>P@RGHOLQJ the dynamics of very large business or economic V\VWHPV´ LV FODVVL¿HG DV V\VWHP VLPXODWLRQ E\ Forgionne (1999, p. 858), and econometric models are among the simulation methods that can provide what-if analysis. For example, in a book about corporate simulation models, Ogunsola (1979) gives examples of econometric equations established for an oil company. In this article, the authors use an econometric model that contains a system of simultaneous equations (equations (1)-(10)). The econometric model (equations (1)-(10)) was established in the authors’ prior related papers (Ha, Forgionne & Wang, 2003a, 2003b) and the dissertation 2 of one of the authors. Usually, simulation models are differentiated as discrete-event and continuous models (Obaidat & Papadimitriou, 2003). If based on the time dimension, an econometric model can EHFODVVL¿HGDVDFRQWLQXRXVPRGHOKRZHYHULI based on product purchases, an econometric model can be treated as a discrete-event model. In this current and the prior related research, we do not consider the time effect in the model. Rather, we focus on product purchases for a particular time period; thus, we are doing discrete-event simulation. The authors’ previous papers (Ha et al., 2003a, 2003b) and research 2 establish the econometric model representing an e-business strategy for the problem formulated here based on general business economics through a deductive approach. There are reasons for using an economic-based approach. For one thing, e-business also follows certain basic business principles that have been existing for decades (Besanko et al., 2004). In addition, whether companies should set up their e-business strategy differently than the traditional business strategy has not been tested empirically

712

DQGH[SOLFLWO\LQWKHUHODWHG¿HOGV0RUHRYHUWR follow a deductive approach, it requires that a general theory should be in place to derive a model of e-business strategy. Among the available theories (e.g., cognitive, management science, accounting, econometrics, and marketing), economic theory is at a high level and is more comprehensive. Finally, the basic economic motivation of e-businesses also makes an economic-based approach more desirable. While the model is built on general business economics, it is operationalized from an e-business SHUVSHFWLYH0RUHVSHFL¿FDOO\WKHRSHUDWLRQDOL]HG model incorporates measures that are unique to e-businesses. An e-business strategy model and a general business strategy model mainly differ by the different meanings or operationalizations of the model variables. Using econometrics enabled the authors to achieve the following capabilities: (1) simulate and evaluate e-business strategies empirically, explicitly, and precisely; (2) incorporate uncertainty (Palmer & Wiseman, 1999) into the analysis through the stochastic disturbance terms in the model’s equations; and (3) explicitly account for the likely interrelationships among the variables in WKHPRGHOLHUHVROYHWKHLGHQWL¿FDWLRQSUREOHP for the model’s parameters). The econometric model from the authors’ previous studies (Ha et al., 2003a, 2003b)2 is reproduced in the simultaneous equations (1)-(10) to make the illustration in this article complete. This model containing variables and their relationships is established on theories with certain assumptions or adaptations and represents the mechanism behind the e-business strategy formulation. For example, equations (1)-(3) are developed directly from economic theories (Hyman, 1986; Landsburg, 1999; Mankiw, 2001). They specify the GHWHUPLQDWLRQRIWKHSUR¿WUHYHQXHDQGTXDQWLW\ sold of an organization. The cost equations (8) and (9) are a direct adoption from economic (Hyman, 0DQNLZ0DQV¿HOG ¿HOG crew] on-site. We know when they’ve restored power. We know that the job has been completed … We can follow up all the details … It’s made a huge difference to us in terms of resolving customer complaints because all the information is actually there” (Customer Services Manager). This use of accurate, real-time information to maintain continuous power supply and improve customer service is consistent with PowerCo’s role as a network provider of critical energy services. Aspects of the complexity of the mobile data solution did become issues. For example, the limited battery life of the PDAs (which often stay GRFNHG LQ WKH ¿HOG FUHZV¶ YHKLFOHV LQ RUGHU WR remain powered) and the range of the Bluetooth wireless connection between the PDA and the mobile phone modem (about 10 meters) effectively shape the crews’ use of the technology. PowerCo’s IS Manager described how aspects of the mobile data solution were designed to cope with crews periodically moving out of coverage. The crews are able to continue to work with the application off-line, updating the job status and then upload-

ing the data when they come back within range. Screen layout and sequence on the PDAs was also PRGL¿HGWRHQKDQFHWKHDSSOLFDWLRQ¶VRSHUDELOLW\ LQ¿HOGFRQGLWLRQV In fact, the mobile data solution was deliberately developed in a way that accommodated the FRQGLWLRQVDQGFKDUDFWHULVWLFVRI¿HOGFUHZVZKR were consulted extensively. As the IS Manager UHFRXQWHG³>7KHGHYHORSPHQWFRPSDQ\@VXSSOLHG most of the developers and it was young people … >7KHLUGHVLJQ@PLJKWEHÀDVK\EXWLW¶VQRWDOZD\V practical … [so] I arranged for them to go out with D ¿HOG FUHZ DQG WKHLU ZKROH DWWLWXGH FKDQJHG 7KH\VXGGHQO\VWDUWHGWRWKLQNOLNHWKH¿HOGFUHZ and not just like a developer.” Nevertheless, some aspects of the mobile data solution remain complex IRUWKH¿HOGFUHZVWRXVH³7KHJX\VVWUXJJOHD little bit with the GIS stuff and it’s been quite a big learning curve for them, but they’re getting there” (Customer Service Manager).

Organizational Characteristics 3RZHU&RKDVLQYHVWHGVLJQL¿FDQWO\LQDGRSWLQJ new technology. It generates, on a daily basis, large volumes of multidimensional and interrelated DVVHWFXVWRPHU¿QDQFLDODQGRSHUDWLRQDOGDWD which is compiled and displayed in a number of formats to allow users to select and drill into various areas for information. Business intelligence provides information analysis and distribution, data visualization, and spatial analysis for decision PDNLQJDQGSODQQLQJ³:H¶UH«DQ,7IRFXVHG [company] and we believe in IT solutions too. $QG LW ZDV PRVW GH¿QLWHO\ D EXVLQHVV GHFLVLRQ that we needed to, that we wanted to go down that track [in adopting mobile technology]” (Customer Service Manager). PowerCo’s IT team takes a reactive approach to IT solutions for the company, focusing on supporting business requirements rather than ³SXVKLQJ´WHFKQRORJ\³:H¶UHUHDOO\LQWKHUHWR try and understand the business needs before we even talk systems” (IS Manager). The impetus

1131

Adoption of Mobile Technology in the Supply Chain

for the adoption of mobile technology was from WRS PDQDJHPHQW ³,W ZDV WRS GRZQ ,W ZDV D EHQH¿WWKDWRXUH[HFXWLYHV«VDZ$QGVROLNH HYHU\ERG\¶VXVLQJZLUHOHVVGHVSDWFKLQJLQ¿HOG crews and we should actually also be using it” (IS Manager). 3RZHU&RXVHVRXWVRXUFHG¿HOGFUHZVZKLFK meant that the contractors had to be convinced to adopt and use the new mobile data solution, including taking responsibility for maintaining WKHPRELOHWHFKQRORJ\LWVHOI³:H¶YHSURYLGHGD certain number of the devices to start with but then from then on they’ve got to buy their own, they’ve got to support their own hardware, that type of thing. So we had to sell it into them as well” (Customer Services Manager). However, PowerCo provided them with training. Project WHDPPHPEHUVZRXOGJRLQWRWKH¿HOGZLWKWKH ¿HOGFUHZV³KROGLQJWKHLUKDQGV´DVWKH\XVHG WKHPRELOHWHFKQRORJ\³LPSURYLQJ@ data quality, and only capturing data once” ‡ ³,W¶VPDGHDKXJHGLIIHUHQFHWR us in terms of resolving customer complaints”

Compatibility

‡ ³,W¶VDOODERXWSUHVHQFHLQWKH marketplace”

• Freight tracking system is a JRRG¿WZLWKWKHFRPSDQ\¶V focus on customer service

‡ ³7KHHQGUHVXOWLVWKDWFXVWRPHUV spend less time in the dark”

Complexity

‡ ³,WHQGHGXSELJJHUWKDQLWZDV ever planned to be”

• Not mentioned

• Aspects of the mobile data soluWLRQKDGWREHPRGL¿HGIRU¿HOG conditions ‡ ³7KHJX\VVWUXJJOHDOLWWOHELW with the GIS stuff”

‡ ³:HWHQGWRSLFNXSWKHQHZ technologies quickly if we can see there’s a clear business input”

• If a company’s IT capability stays ahead of the business, the business will always be prepared for new challenges

‡ ³:H¶UHDQ,7IRFXVHG>FRPSDQ\@ and we believe in IT solutions”

‡ ³7KHFXUUHQWPDQDJHPHQWLV very, very supportive”

• Management were quick WRVHHWKHEHQH¿WVDQGVXSported the innovation

• Adoption of mobile technology was initially a top-down decision

• IT team actively scans the technological environment

• IT team actively seeks ³LQQRYDWLYHVROXWLRQVDQG ideas”

‡ ³:H¶UHUHDOO\LQWKHUHWRWU\DQG understand the business needs before we even talk systems”

‡ ³3XWWLQJDFRPSXWHULQIURQW of [some of] them was terribly daunting”

‡ ³7KHUHZDVDORWRIUHVLVtance by the drivers … to change and technology”

‡ ³,W¶VMXVWWHFKQRORJ\WKDWWKH\¶UH not used to” ‡ ³5 years 2-3 years > 5 years > 5 years > 5 years

1241

An Online Success Story

down the changes in the BAP business model, and compare its actions with those of the competition. Following in the footsteps of Pettigrew (1990), we tried to distinguish the extreme situations, critical incidents and social dramas that led to changes in the business model or strategy, and subsequently to offer a reason for BAP’s success.

in popularity. The number of visitors took off in 2001. Naturally the massive expansion in the availability and use of the Internet in Finland enlarged the number of potential users of the BAP online services as well (e.g., Nurmela et DO 6LQFHWKHQWKHVLWHWUDI¿FKDVEHHQLQcreasing constantly, with some minor short-lived exceptions. At the time of the data collection in 2004 the growth was continuing, although it had slowed down slightly. Interestingly, all the time when the Web site use was on the increase the printed circulation of BAP remained relatively stable. Bearing in mind the fact that the general trend in magazine publishing all over the world is that circulations are declining as more and more magazine titles are being launched, we think the BAP print magazine has done very well. Figure 2 shows both the circulation of the print version (grey line) and the numbers of online visitors (black line). It is evident that BAP has done something ³ULJKW´LQWHUPVRILWVRQOLQHVWUDWHJ\LWV:HE success has not cannibalized the print version1, for example, and in 2004 approximately 2,800 new members registered with the online service on an average day. In the following section we track

Case Analysis The research revealed a number of important ¿QGLQJVUHJDUGLQJWKHGHYHORSPHQWRIWKHEXVLness-model dimensions within the case company. In general, the development of the BAP online activities occurred in an incremental manner, although it is worth noting that there were two points within the history of BAP at which the :HEVLWHWUDI¿FLQFUHDVHGPRUHUDSLGO\LQ and 2003. Taking our cue from these moments of time, we divided our case analyses into three episodes or epochs, each of which is more fully elaborated upon in turn. Interestingly, it seems WKDWVHYHUDOVLJQL¿FDQWLQFLGHQWVRFFXUUHGZLWKLQ the company during those periods, and there were some changes in the business model.

Figure 2. Developments in the use of the Web services and printed circulation of BAP

Unique visitors per month / circulation

160 000 140 000 120 000 100 000 80 000 60 000 40 000 20 000 0 1998

1242

1999

2000

2001

2002

2003

2004

2005

Year

An Online Success Story

1998-2000: Initial steps The foundation of the BAP Web site in 1998 resulted from the editorial department’s initiative. There were some Internet enthusiasts in the company and they sensed the coming boom in both the use of and services offered on the Internet. When the strategic decision to create the Web site was taken they came up with the idea of discussion forums as content for it: BAP was WKH ¿UVW WR LQWURGXFH RQOLQH GLVFXVVLRQ IRUXPV in the baby and pregnancy segment in Finland. There were two clear objectives for the online service. First, the creation of forums was seen as an easy way to build an innovative image for the magazine cheaply and, consequently, the Web site had some marketing objectives. Second, it was thought that a magazine with a Web site with an interactive forum should be able to offer some extra value to its customers: it showed common sense to assume that forums could be useful for readers of the print version, and mothers and fathers could exchange their experiences regarding baby and pregnancy issues. Thus, according to our interpretation, the Web site was seen as a minor product extension and as some kind of companion site for the print magazine. However, the revenue generation from the online services as such was not even considered, and the status of the Web site was rather low. Accordingly, it is obvious that the subsequent success of the forums was not anticipated at the time. No market research was conducted, nor

were many resources given to the Web team. For example, no customer service was planned for the online arm. In spite of this lack of resources during the period of its early development, the BAP Web site reached a critical mass through word of mouth. The visitors themselves had realized the value of the service, and in essence created the site and its content by utilizing the discussion forums. Table 2 presents the main elements of the online business model in 1999, shortly after the foundation of the Web site. At that time BAP did not even consider the possibility of incorporating other business-model elements or dimensions into its online operations.

BAP and the Competition in the Market in 1999-2001 There was no online competition within the baby and pregnancy magazine market segment in 1999. In 2001, when the use of the Internet had started to grow rapidly in Finland, some of the competitors within the segment started to develop their online operations and launched their Web sites accordingly. The content provided differed from BAP in many ways: most of the competing PDJD]LQHV ¿OOHG WKHLU VLWHV ZLWK SRVWHUV IURP the print magazine, that is, used the Internet in a passive way as a static form of advertising. The typical content included pictures showing the cover of the print version, tables of contents from different issues, and extracts from the editorial

Table 2. Business model in 1999

Product development

Revenue logic

1. No editorial content: only online-discussion forums-> new content

Marketing and sales

Service and implementation

 :DQWHG WR EH ¿UVW LQ the market-> marketing of the magazine

1243

An Online Success Story

content. This approach differed from that taken by BAP: the Internet was used as an independent medium, the product being tailored to suit it and not to overlap with the printed content.

2001 to Early 2003: The First Period of Rapid Growth ,Q WKH FDVH RI %$3 ZKHQ WKH :HE VLWH WUDI¿F really took off its importance and value grew within the magazine publisher independently of the magazine. The Web site was found to be a good tool with which to enhance the magazine brand. Consequently, an editorial Web master was recruited and the development of the site, which had been outsourced, was taken in-house. More emphasis was placed on product development, and the Web master started to use customer feedback as a basis for improving the site. The advertising and circulation functions of the publisher also started to realize the potential of the Internet during this period and they analyzed potential sources of revenue. The circulation department started distributing the URL address of the magazine in its marketing material, for example. They also introduced the online-subscription option, which was eventually taken up by a few subscribers. Furthermore, the ¿UVWDGYHUWLVLQJVDOHVWRWKHRQOLQHVHUYLFHVZHUH PDGH7KH¿UVWDGYHUWLVHPHQWVZHUHEXWWRQVDQG banners, but these proved to be troublesome to

PDVWHUZLWKWKHLQÀH[LEOHDUUDQJHPHQWVWKDWZHUH in force as sales were scattered both in-house and among the outsourced sales organization. The changes and the above-mentioned developments led to the readjustment of the online business model of the company. Table 3 shows the key elements of the BAP business model around the year 2001. It is clear that the role of the online service had strengthened within the strategy of the magazine, but the publisher still saw the Internet as a second-tier medium. The Web site did not generate much revenue and its basic function was seen to be to support the brand. It is worth noting that an important milestone was reached around this time: the number of visitors to the Web site exceeded the number of print subscriptions (Figure 2). As this positive trend continued the different functions of the magazine became conscious of some new opportunities in the online presence. For example, the advertising IXQFWLRQUHDOL]HGWKHEHQH¿WVRIDQLQFUHDVLQJO\ segmented audience. Lively discussion forums could also provide information to the editorial staff on topics seen to be of importance, and thereby generate content for the print magazine; they would be good channels for marketing research. As far as the circulation function was concerned, the Web site visitors were considered a target: a large number of potential new subscribers to the print magazine were utilizing the service.

Table 3. The business model in 2001

1244

Product development

Revenue logic

Marketing and sales

Service and implementation

1. Customer feedback used as a basis for Web site improvement

1. First advertising sales 2. Few online subscriptions

1.Web sit seen as a means for supporting the brand 2. Online subscriptions started

1. Customer service

An Online Success Story

Crisis in 2003 In general, it was realized that this huge number of discussants in the forums could be a source of many advantages, and the magazine publisher did not know much about them. As a result, BAP decided to demand compulsory registration in 2003. Many users were taken aback by this decision and some of them established shadow sites instead of completing the registration. This development PD\KDYHEHHQUHODWHGWRWKHVSHFL¿FQDWXUHRIWKH BAP Web site: although babies and pregnancies could be counted among the happiest and most emotional topics in Western cultures, the tone was not always positive, and discussion was not limited to parent-baby issues. Correspondingly, many users wanted to participate in this type of discussion anonymously. However, at the time of the crisis the publisher took a step backwards. The rebellion made BAP

change its registration system almost back to its former modus operandi, and it managed to win back its former visitors in a rather short period of time. Registration for some of the forums, including the most popular one, was made voluntary. Currently, most of them require registration before participation in the discussion, that is, posting, but anyone can write anonymously on WKUHHRIWKHPVH[IUHHWRSLFDQG³RQOLQH´7KH last-mentioned is BAP’s closest equivalent to a real-time chat room; it is a discussion forum that is updated every minute.

Late 2003–2004: The Second Period of Rapid Growth Since its short-lived crisis the site has been constantly updated and improved. Its popularity has brought positive publicity to the magazine, and the BAP discussion forums have also become a

Table 4. The business model in 2004 (at the time of the data collection) Product development

Revenue logic

Marketing and sales

Service and implementation

1. Market research: Grasp of the audience, idea pool 2.Means for collecting material for the print magazine (e.g., surveys) 3. Continuous development of the print + Web concept 4. Improving the versatility of online advertising 5. Improving the pricing knowledge of online advertising 6. Adds a new "life like" dimension to the magazine concept

1. Helps with defending the market positon in terms of circulation and advertising sales 2. Extending the subscription length 3. Preventing the escape of the audience to competitors 4. Increase of advertising sales (sales of multichannel packets) 5. Web site another attractive advertising forum beside the magazine 6. Online subscriptions: lower costs and higher subscription prices than direct or telephone marketing campaigns

1.Communicates a modern image 2. Communicates the magazine's values 3. Suporting the brand 4. Positive publicity 5. Online registration a basis for customer database and targeted marketing 6. Online subscriptions as a complementary channel 7. Supporting customer loyalty and commitment

1. Means for communicating with the target audience on a daily basis 2. Customer service

1245

An Online Success Story

popular news topic in other media. Advertisers were attracted to the strong image of the online service and this led to an increase of advertisePHQWV ERWK RQOLQH DQG LQ SULQW $ VLJQL¿FDQW internal development of the service was related WRWKHDYDLODELOLW\RI¿QDQFLDOUHVRXUFHVWKHRQline team was given more resources to develop the Web site and to communicate with the target audience on a daily basis. Correspondingly, there were changes and further developments in the business model (see Table 4). The product-development element was developed further. The Web content came to include samples of the editorial content within the print magazine, and, vice versa, the Web community was used more as a source of ideas and stories that were to appear in print. The advertising function also came up with new ideas: it took the Web sales back in-house, and developed new systems to allow a more versatile selection of online advertising forms. The registration of users provided the circulation function with a tool for contacting potential subscribers, and allowed for the lengthening of the subscription period as many pregnant women utilized the Web service. Furthermore, marketing to potential customers online is cheaper than utilizing telephone sales. The Web site was also seen to support the circulation by enhancing reader commitment: virtual communities may build up customer loyalty and trust (e.g., Srinivasan, Anderson & Ponnavolu, 2002; Wang, Chia-Yi, Pallister & Foxall, 2006). These issues are linked with both the revenue logic and the marketing and sales elements within the business-model framework.

BAP and Competition in 2004 BAP is a clear market leader on the Internet in its own segment. The online service is well known, it generates lots of interest, and it has become bigger than the print version. Although all the direct competitors (i.e., magazines focused on babies

1246

and pregnancy) have created their own discussion forums (and have even tried to copy BAP), the BAP forums are well ahead of the competitors’ equivalents in terms of popularity. Furthermore, the BAP online business model seems to be more complete than the others. For example, it has managed to use the Web site as a marketing tool. Its success has taken it to other media as news, its online advertising sales have helped the publisher to catch with up competitors in revenue terms, and its brand value has been enhanced. In our opinion, the case magazine has also been able to make better use than its competitors of multi-channel tactics in its product development: readers are helping to generate material for the print version, and many of the articles include links to the content available on the Internet. To us it seems that the BAP Web site has far more to offer than direct online revenue streams. Most Finnish magazines targeted at women are still only using the Web as an advertisement for the print edition, and, interestingly enough, it seems that only its direct competitors have followed the BAP example. In general, online services may support many functions and business-model elements that are important to a magazine’s success. We will now discuss several key issues that have been behind the online popularity of BAP, and consequently vital to its overall success.

Discussion: What Lies Behind the Success Story? In our view, the key issue in the BAP Web site development since the early days has been the discussion forums. As mentioned above, they are the most utilized part of the online service and there are currently more than 40 of them. 7KH PDJD]LQH ZDV WKH ¿UVW LQ LWV VHJPHQW WR SURYLGHVXFKIRUXPVDQGWKHWUDI¿FRQWKHVLWH grew mostly through word-of-mouth. They have EHQH¿WHGIURPWKHSRVLWLYHIHHGEDFNZKLFKKDV

An Online Success Story

led to positive network effects (e.g., Shapiro & Varian, 1999). Discussion forums could be seen as one type of virtual community, and the key notion here is customer loyalty created by online community activities. Furthermore, the fact that there was no editoULDOFRQWHQWRQWKH:HEVLWHDW¿UVWDQGWKDWWKH BAP online product development was driven by LWVFXVWRPHUVUHÀHFWHGDFOHDUDQGFRXUDJHRXV strategic decision. The publisher provided a platform, a discussion forum, and the users created the content and the value. This decision led to the evolution of the BAP online business model: the publisher did not want to copy the print version and instead created an online product with different characteristics. This could be seen as a critical incident leading BAP to its online path. In general, the development of the BAP business model has been led by the product-development element of the company (and the editorial leg of the magazine). The print magazine has been extended with this interactive arm of the brand. Accordingly, while the network effects and e-word-of-mouth partially explain the consumer adoption of the BAP Web site, the crucial determinant of its success may have been its internal adoption as a part of the magazine concept. The role of online operations within the business model JUHZRYHUWLPH7KH¿UVWHQWKXVLDVWLFLQGLYLGXDOV within the company, such as the chief online editor, played a key role in the development of its online advertising sales by educating both sales people and customers. Innovations and their adoption are based on individuals (Tang, 1998); they only succeed if the innovation-to-organization problems can be solved (Dougherty & Hardy, 1996). The decision to limit the BAP Web site to discussion forums during the early phase of its online operations was innovative: it was a trendsetter, and its ¿UVWPRYHU DGYDQWDJH ³EURXJKW LQ´ WKH FULWLFDO mass in 1999. There were no large risks during the early phases either. As the Web site content differed from the print version, there was no risk of can-

nibalization, and as the readers created the content, it was cost-effective as well. In this regard, another interesting development in the business model RIWKHPDJD]LQHZDVWKDWWKH¿QDQFLDOHOHPHQW (which is often considered a success criterion, e.g., Magretta, 2002) did not play a large role at the start of the online operations. It seems that RQHRIWKHELJLVVXHVLQWKHFUHDWLRQRIWKLV¿UVW online strategy was the low cost. No revenues ZHUHH[SHFWHGLQWKH¿UVWSODFHDOWKRXJK%$3 DGRSWHG D OHVVWKDQH[SOLFLW ³PDUNHW UHVHDUFK channel perspective” on virtual communities as early as in 1998 (e.g., Catteral & Maclaran, 2002; Pitta & Fowler, 2005). The aim of the Web site ZDVWR³WRJHWDJUDVSRIWKHDXGLHQFH´WRFUHDWH DQ³LGHDSRRO´DQG³WRJHWDWRXFKRIUHDOOLIH´ and to provide material for the print magazine and guide its development, possibilities that gradually materialized. In 2001 it started to collect customer feedback and in 2004 the use of the discussion forums in the further development of the magazine brand and content base became even more evident. The Web site has always supported marketing and sales purposes, too. This is a business-model GLPHQVLRQ WKDW FDUULHV YDULRXV EHQH¿WV /HW XV consider the image factors. First, the Web site gave BAP a technologically advanced image. Furthermore, the somewhat anarchistic and sometimes even wild nature of the community using the discussion forums also extended the brand RIWKHPDJD]LQHDQGJDYHLW³VWUHHWFUHGLELOLW\´ The content of the Web site was not a column written by an expert telling mothers and fathers how wonderful it was to be a parent or how to raise one’s children, it was more of a real-life experience. In terms of revenue logic, as mentioned above, BAP introduced the option to subscribe to the print magazine online during its second epoch (around 2001). There are two main factors that make online subscriptions especially valuable to BAP. First, the costs are rather low, which PDNHV WKHP SUR¿WDEOH DQG LQ DGGLWLRQ IDLUO\

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An Online Success Story

high prices are charged as the publisher does not want to annoy current subscribers using the online service with aggressive offerings on the Web site. Second, customers belonging to the online community may be more loyal to BAP as virtual communities can create trust and commitment. It is evident that this was one of the key reasons why the circulation function was interested in the online operations. It seems to us that the development of the BAP business model has been fairly incremental, featuring a few critical incidents or decisions that have shaped its growth path. Figure 3 summarizes our analysis of the importance and evolution of the four elements of the business model between 1998 and 2004. As mentioned above, the product development element has shaped the nature of the progress of the online operations. Marketing and sales in the form of both circulation and advertising followed: the circulation function was mostly interested in defending its position, and in getting new print subscribers and long-term customers from the group of visitors on the site, while the advertising personnel considered the

YROXPHRIVLWHWUDI¿FLPSRUWDQWDVLWSURYLGHGD sales argument for online ads. However, the idea of large-scale revenue generation from the actual Web site did not occur before 2001, and its role has increased only recently. The servicing and implementation dimension was given thought rather late as well. To conclude, several key decisions made in the various stages of the BAP life-cycle could be considered a basis for its success. First, the innovative and courageous decision taken in the early phase was critical. This was atypical for media industry. According to Davis (2004), many media companies tend to work from inside-out ¿UVWWKHIRFXVEHLQJ¿UVWLQWKHLUH[LVWLQJSURGXFWV +RZHYHU%$3ZDVD¿UVWPRYHUDQGWKH:HE site was established as an independent medium WKDWZDVDEOHWREHQH¿WIURPWKHVWUHQJWKVRIWKH Internet, such as interactivity. Furthermore, the forums did not cannibalize the print medium. Second, the change in the business model in 2001 was decisive: the competitive situation had changed. Here, BAP did not copy what the others were doing, and instead strengthened the funda-

Figure 3. The development of the BAP business model. Code: the more colorful the arrow, the more important the element in the current business model during that period

Product development

Revenue logic

Marketing and sales

Service and implementation

1998

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1999

2000

2001

2002

2003

2004

An Online Success Story

mental idea of the discussion forum. For example, more resources were given to the online team and the publisher, and BAP developed new ideas for utilizing the Internet even more effectively, for example, in the form of data collection. Third, in 2003-2004 the company started to react more rapidly to competitors’ moves and customer feedback. At this stage the publisher considered all the elements found in the business model developed by Rajala et al. (2001), for example, more carefully, and established how they were connected to the three-legged stool (Daly et al., 1997). This also led to the reanalysis of the business model of the publisher as a whole. With the help of the peer-to-peer discussion forums, BAP thus became a more down-to-earth medium; in our opinion this would not have been possible with only a print version. We believe that the online service is currently considered complementary to the print magazine, and the service carries many important functions that contribute to both the editorial content and the marketing of the magazine.

Implications for Research and Practice The objective of this case study was to explore the motives behind the chosen and developed business model, and behind the success factors of the magazine Web site. In our view, a successful Web site may well complement rather than substitute the print magazine, and add a more lifelike dimension to the magazine concept—and to the corresponding business model. The main limitation of our study is that it was based on a single case. The chosen case may not be a typical example of magazine Web services, EXWZHEHOLHYHWKDWLWVVSHFL¿FDWWULEXWHVHQDEOHG conclusions to be drawn that are useful to ebusiness researchers and practitioners. Another limitation was that the early-development phases of the case were described in retrospect.

Nevertheless, we believe that our analysis and discussion allow us to suggest some interesting implications. From the researchers’ perspective, the notion of network effects and virtual communities is worth considering. Even though Porter (2001) was critical of the network effects of the Internet, our study indicates that a Web page with an active virtual community may well witness positive-feedback economics and higher switching costs: advantages may accrue WR WKH ¿UVW PRYHUV -RKDQVVRQ  6KDSLUR & Varian, 1999), resulting in a loyal customer base (Srinivasan et al., 2002; Wang et al., 2006). Customer loyalty, we believe, is the key concept online. The potential of online brand communities has also been acknowledged within the magazine publishing industry (FIPP, 2005), yet academic research is still scarce. This provides interesting avenues for future study. There are further implications for practicing media managers. First, an Internet presence should be seen from a more multifaceted perspective, and should not merely focus on revenue streams. Our case illustrates that a Web site may support all the four dimensions (revenue logic, product development, marketing and sales, and servicing and implementation) of a magazine publisher’s business model. On the basis of our results we suggest that success in implementing the Internet into the company’s business model is more likely to occur when special on-line features are innovatively leveraged than when the Internet is forced to mimic what has been done off-line. BAP successfully utilized this strategy from the beginning of its online operations. Our case also illustrates the importance of incrementally developing and strengthening online offerings in line with customer feedback and developments in the competitive environment. Second, we suggest that active online services should be valued and exploited alongside the development of the print product. We agree with Galbi’s (2001) suggestion that the print media

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should seek to build brands that are based on the active involvement of their readers and on actions they may take on the Web. As in the BAP case, successful media-industry operators may gain advantages by possessing large and active discussion forums. We believe that further longitudinal studies should be carried out in order to identify and evaluate the success factors of Web pages and virtual communities. As suggested here, it would be useful in this case to study the development of the organization through critical incidents or ³FULVHV´ *UHLQHU  .D]DQMLDQ 'UD]LQ  Glynn, 2000).

REFERENCES Amit, R., & Zott, Z. (2000). Value drivers of e-commerce business models (INSEAD Working Paper). Retrieved February 10, 2007, from http://www.insead.fr/faculty research/workingpdf/2000-54.pdf BarNir, A., Gallaugher, J.M., & Auger, P. (2003). Business process digization, strategy and the LPSDFW RI ¿UP DJH DQG VL]H 7KH FDVH RI WKH magazine publishing industry. Journal of Business Venturing, 18, 789-814. Barsh, J., Kramer, E., Maue, D., & Zuckerman, N. (2001). Magazines’ home companion. The McKinsey Quarterly, Special Edition 2, 83-90. Betz, F. (2002). Strategic business models. Engineering Management Journal, 14(1), 21-27. Boulton, R., Libert, B., & Samek, S. (2000, July/ August). A business model for the new economy. Journal of Business Strategy, pp. 29-35. Catterall, M., & Maclaran, P. (2002). Researching consumers in virtual worlds: A cyberspace odyssey. Journal of Consumer Behavior, 1, 228-237. Chararbaghi, K., Fendt, C., & Willis, R. (2003). Meaning, legitimacy and impact of business

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models in fast-moving environments. Management Decision, 41, 372-382. Chesbrough, H., & Rosenbloom, R. (2002). The role of the business model in capturing value from innovation: Evidence from Xerox corporation’s technology spin-off companies. Industrial and Corporate Change, 11, 529-555. Choi, D., & Valikangas, L. (2001). Patterns of strategy innovation. European Management Journal, 19, 424-429. Daly, C.P., Henry, P., & Ryder, E. (1997). The magazine publishing industry. Needham Heights: Allyn and Bacon. Davis, D. (2004). Rx for new product success: A guide to successful innovation for media executives (Report). Northwestern University Media Management Center. Dickinson, T. (2000, July/August). Can you patent your business model? Harvard Business Review, p. 16. Dougherty, D., & Hardy, C. (1996). Sustained product innovation in large, mature organizations: Overcoming innovation-to-organization problems. Academy of Management Journal, 39, 1120-1153. Doyle, G. (2002). Understanding media economics. London: Sage Publications. Dyer, W.G., & Wilkins, A.L. (1991). Better stories, not better constructs, to generate better theory: A rejoinder to Eisenhardt. Academy of Management Review, 16, 613-619. Fetscherin, M., & Knolmayer, G. (2004). Business models for content delivery: An empirical analysis of the newspaper and magazine industry. The International Journal on Media Management, 6(1-2), 4-11. FIPP (2003). Routes to success for consumer magazine Websites. A survey by the International Federation of the Periodical Press. Retrieved

An Online Success Story

)HEUXDU\IURPKWWSZZZ¿SSFRPDVVHWVGRZQORDGV¿SSFRQVXPHUVXUYH\SGI FIPP (2005). Routes to success for consumer magazine Web sites. A survey by the International Federation of the Periodical Press. Compiled by G. Consterdine. Retrieved February 10, 2007, from KWWSZZZ¿SSFRPDVVHWVGRZQORDGV&RQVXPerMagWeb.pdf *DOEL' 7KHQHZEXVLQHVVVLJQL¿FDQFH of branding. The International Journal on Media Management, 3(4), 192-198. Gallaugher, J.M., Auger, P., & BarNir, A. (2001). Revenue streams and digital content providers: An empirical investigation. Innovation and Management, 38, 473-485. Greiner, L.E. (1998, May-June). Evolution and revolution as organizations grow. Harvard Business Review, pp. 55-67. Grönlund, M., & Toivonen, T.E. (2003). Magazine DQG QHZVSDSHU VWUDWHJLF SUR¿OHV DQG WKH QHZ media. A diagnostic approach. Towards New Media Paradigms, Content, Producers, Organisations and Audiences. In II Cost A20 International Conference Proceedings (pp. 431-440). Hamel, G. (2000). Leading the revolution. Boston: Harvard Business School Press. Jensen, J.L., & Rodgers, R. Cumulating the intellectual gold of case study research. Public Administration Review, 61(2), 235-246. -RKDQVVRQ 7   /LJKWLQJ WKH FDPS¿UH The creation of a community of interest around a media company. The International Journal on Media Management, 4(1), 4-12. Kaiser, U. (2003). The effects of website provision on the demand for German women’s magazines (Discussion Paper 2003-31). University of Southern Denmark at Odense, Centre for European Economic Research and Centre for Economic and Business Research.

Kaiser, U. (2005). Magazines and their companion Websites: Competing outlet channels? (Discussion Paper). University of Southern Denmark at Odense. Kazanjian, R.K., Drazin, R., & Glynn, M.A. (2000). Creativity and technological learning: The roles of organization architecture and crisis in large-scale projects. Journal of Engineering and Technology Management, 17(3-4), 273-298. .QJ/ :KDWPDNHVPHGLD¿UPVWLFN" ([SORULQJWKHKLGGHQGULYHUVRI¿UPSHUIRUPDQFH In R.G. Picard (Ed.), Strategic responses to media market changes (JIBS Research Reports Series No. 2004-2). Lumpkin, G.T., & Dess, G. (2004). E-business strategies and Internet business models: How the Internet adds value. Organizational Dynamics, 33(2), 161-173. Magretta, J. (2002). Why business models matter. Harvard Business Review, 80(5), 3-8. Mahadevan, B. (2000). Business models for Internet-based e-commerce: An anatomy. California Management Review, 42(4), 55-69. McDonald, M. (1992). Strategic marketing planning: A state-of-the-art-review. Marketing Intelligence and Planning, 10(4), 4-22. Mitchell, D., & Coles, C. (2003). The ultimate competitive advantage of continuing business model innovation. The Journal of Business Strategy, 24(5), 15-21. Nurmela, J., Heinonen, R., Ollila, P., & Virtanen, V. (2000). Matkapuhelin ja tietokone suomalaisen arjessa [Mobile phones and computer as parts of everyday life in Finland]. Tilastokeskus, Helsinki: Katsauksia. Patton, M.Q. (2002). Qualitative research and evaluation methods. Thousand Oaks, CA: Sage Publications.

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Pitta, D.A., & Fowler, D. (2005). Internet community forums: An untapped resource for consumer marketers. Journal of Consumer Marketing, 22(5), 265-274. 3HWWLJUHZ $0   /RQJLWXGLQDO ¿HOG UHsearch on change: Theory and practice, Organization Science, 1(3), 267-292. Picard, R.G. (2002 7KHHFRQRPLFVDQG¿QDQFing of media companies. New York: Fordham University Press. Porter, M.E. (2001, March). Strategy and the Internet. Harvard Business Review, pp. 63-78. Posnock, S.T. (2001). Low-risk revenue streams (Folio 15.6.2001). Retrieved February 10, 2007, from http://www.keepmedia.com/pubs/Folio/2001/06/15/139035 Rajala, R., Rossi, M., Tuunainen, V., & Korri, S. (2001). Software business models: A framework for analyzing software industry. Tekes Technology Review, 108. Rappa, M. (2000). Business models on the Web. Retrieved February 10, 2007, from http://ecommerce.ncsu.edu/topics/models/models.html Rogers, E.M. (1962). Diffusion of innovations. New York: The Free Press. Shapiro, C., & Varian, H.R. (1999). Information rules: A strategic guide to the network economy. Boston: Harvard Business School Press. Simon, D.H. (2005). The effect of a magazine’s digital content on its print circulation: Cannibalization of complementary? (Working Paper). Cornell University. Slywotzky, A. (1996). Value migration. Boston: Harvard Business School Press. Srinivasan, S.S., Anderson, R., & Ponnavolu, K. (2002). Customer loyalty in e-commerce: An exploration of its antecedents and consequences. Journal of Retailing, 78(1), 41-50.

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Stahl, F., Schäfer, M.-F., & Mass, W. (2004). Strategies for selling paid content on newspaper and magazine Web sites: An empirical analysis of bundling and splitting of news and magazine articles. International Journal on Media Management, 6(1-2), 59-66. Stake, R.E. (1995). The art of case study research. Thousand Oaks, CA: Sage Publications. Tang, H.K. (1998). An integrative model of innovation in organizations. Technovation, 18(5), 297-309. Tellis, W. (1997, September). Application of a case study methodology. The Qualitative Report, 3(3). Retrieved February 10, 2007, from http://www. nova.edu/ssss/QR/QR3-3/tellis2.html Timmers, P. (2000). Electronic commerce: Strategies and models for business-to-business trading. West Sussex, UK: John Wiley & Sons Ltd. Vasisht, P., & Gutierrez, J.A. (2004). An investigation of revenue streams of New Zealand online content providers. Journal of Global Information Management, 12(4), 75-88. Wang, H.-C., Chia-Yi, M.-H., Pallister, J.G., & Foxall, G.R. (2006). Innovativeness and involvement as determinants of Web site loyalty: II. Determinants of consumer loyalty in B2C e-commerce. Technovation, 26, 1366-1373. Yin, R.K. (2006). Case study research. Design and methods (3rd ed.). Thousand Oaks, CA: Sage Publications.

ENDNOTE 1

Several authors have addressed the so-called cannibalization question within the media industry (e.g., Kaiser, 2003, 2005; Simon, 2005; Stahl, 2004), that is, if the digital content and online presence lower the print circulation.

An Online Success Story

APPENDIX

•

Interview Themes

•

BAP Web Site Development

•

• •

Could you describe your role in the development of the BAP Web site? Could you name other important persons who have had an important role in the Web site development?

Could you describe the development of the BAP Web site since its beginning? What do you consider the most important phases of the development? Why? What do you consider the most important crises in the BAP development? Why?

The BAP Web Site Today • •

What are the main goals of the Web site? How do you see the relationship between the Web site and the print magazine?

This work was previously published in the International Journal of E-Business Research, edited by I. Lee, Volume 3, Issue 3, pp. 40-56, copyright 2007 by IGI Publishing (an imprint of IGI Global).

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Chapter 4.17

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa: An Exploratory Study from Nigeria 3ULQFHO\,¿QHGR University of Jyväskylä, Finland

ABSTRACT

INTRODUCTION

The use of information communication technologies (ICT) especially the Internet by small- and medium-sized enterprises (SMEs) is on the increase in many regions of the world, including Africa. Nevertheless, empirical evidence from Sub-Saharan Africa (SSA) regarding the factors that affect the adoption of e-business is scarce. In that regard, the main objective of this chapter LV WR ¿OO WKH UHVHDUFK JDS ZLWK DQ H[SORUDWRU\ study that is aimed at eliciting views from SMEs in Nigeria. This article made use of a theoretical framework encompassing organizational, external and technological contexts to deliberate the issue. A survey is conducted in three Nigerian cities DQGWKH¿QGLQJVRIWKHVWXG\DUHSUHVHQWHG7KH implication of the study is discussed and future research directions also given.

The use of information communication technologies (ICT) by small- and medium-sized enterprises (SMEs) is already an established way of life in the developed countries (Beck, Koenig, & Wigand, 2003; Bunker & MacGregor, 2002; Lockett & Brown, 2003) and has been extensively studied in extant information systems (IS) literature (see, for example; Beck et al., 2003; DeLone, 1988; Kalakota & Robinson, 2001; Montazemi, 1988; Pigni, Faverio, Moro, & Buonanno, 2004; Poon, 2002; Scupola, 2003). In contrast, only a few research have surfaced wherein e-business in the developing countries including Sub-Saharan Africa (SSA) are discussed (Chifwepa, 1998; Heeks & Duncombe, 2001; Masten & Kandoole, 2000; Okoli, 2003; Okoli & Mbarika, 2003; Travica, 2002). We want to add to these few available

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

studies by looking at the possibility of e-business adoption by SMEs in Nigeria. In this chapter, a business with up to 250 employees is categorized as an SME according to the European Parliament’s GH¿QLWLRQ2(&' 2QWKHZKROH60(VDUH characterized by informal and inadequate planQLQJVWURQJRZQHU¶VLQÀXHQFHODFNRIVSHFLDOists, small management team, heavy reliance on few customers, limited knowledge and so forth (Bunker & MacGregor, 2002, Reynolds et al., 1994; Yap, Soh, & Raman, 1992). Further, the term e-commerce is often used interchangeably with e-business by many, though some experts have pointed out a difference. For example, Turban, Lee, King, and Chung (2000) assert that the former refers to buying and selling electronically and it is a subset of the latter, which is broader and includes the servicing of customers, collaborating with entities both within an organization DQGRXWVLGHLW=ZDVV GH¿QHGHEXVLQHVVDV ³WKHVKDULQJRIEXVLQHVVLQIRUPDWLRQPDLQWDLQLQJ business relationships, and conducting business transactions by means of the telecommunication networks” (p. 3). Here, both concepts are referred to as e-business. The adoption of ICT by SMEs reported widely is literature tend to focus attention on the developed West (see Beck et al., 2003; Bunker & MacGregor, 2002; Poon & Strom, 1997; Scupola, 2003). Examples of countries in the West include the US, Australia, and Italy. On the whole, these studies pertaining to ICT and SMEs or e-business in general have deliberated ICT deployment, organizational and environmental factors concerning ICT use in business, success issues and so on (Abell & Lim, 1996; DeLone, 1998; Lockett & Brown, 2003; Poon & Strom, 1997; Walczuch, den Braven, & Lundgren, 2000; Yap et al., 1992). This chapter will attempt to look at some of those factors from the perspective of SSA. Importantly, many development research and reports have noted how ICT usage and adoption in

the developing countries (and their by SMEs) could redress some of the inequalities resulting from WKHHPHUJLQJ³GLJLWDOGLYLGH´FXUUHQWO\H[LVWLQJ between the developed North and the developing South (Avgerou, 1998, 2003; Baliamoune-Kutz, 2003; Castells, 1999; Mbarika, Jensen, & Meso, 2002; Molla, 2000; Okoli, 2003; Singh, 2000; Travica, 2002; WSIS, 2004). Moreover, it is important to have some understanding regarding the diffusion of e-business (if any) in SSA in light of the fact that some aspects of that society may impact the adoption of ICT in general and e-business, in particular. Further, among the few studies on e-business adoption in SSA, the work of Okoli (2003) has discussed the LPSDFWRIFXOWXUDOIDFWRUV+HDVVHUWVWKDW³$IULcans do not have the culture of buying a product without tactile contact … where the consumer can feel and examine the product before haggling…” (Ibid, p. 16). Thus, a research study of e-business in the SSA region may be useful for both theory and practice. Thus, the objective of this chapter is to present WKHSUHOLPLQDU\¿QGLQJVUHODWLQJWRWKHSHUFHStion and adoption e-business by SMEs in Nigeria. Primarily, this study is exploratory in nature and uses a survey. It is hoped that this article would contribute to knowledge as it seeks to assess ebusiness and/or the use of the Internet/IT by SMEs in Nigeria, and perhaps serve a base for further discussions and studies on the issue. Answers to the following questions will be provided in the chapter. Firstly, what are the state of preparedness and/or readiness of Nigerian SMEs for e-busiQHVV"6HFRQGO\LQZKLFKVSHFL¿FZD\VGR60(V FXUUHQWO\XVHWKH,QWHUQHW"7KLUGO\ZKDWEHQH¿WV do SMEs in Nigeria seek as they contemplate using—or currently use—the Internet in their business operations? And, in generic terms, what are the main barriers to e-business adoption in Nigeria?

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Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

Background Information about Nigeria and Sub-Saharan Africa Nigeria is the most populous country in Africa and has a population of about 140 million (World Bank Group, 2004). It is one of the fastest growing economies in SSA, and has a large number of small businesses complementing its oil-run economy. According to Ojukwu and Georgiadou (2004), 97% of all businesses in Nigeria employ less than 100 employees. This fact is similar to other SSA countries, where SMEs also form the bedrock of their economies (Matambalya & Wolf, 2001; Mead & Liedholm, 1998). Unarguably, SMEs are viewed as the economy growth engine of many nations—be they developing or developed (Brouthers, Andriessen, & Nicolaes, 1998). Sadly, the use of ICT by SMEs in Nigeria does not appear to be pervasive; however, events on the ground in Nigeria such as the on-going liberalization policy in the telecommunication sector are creating opportunities for the emergence of HEXVLQHVV $MD\L  ,¿QHGR   $OVR Nigeria is one of the best-performing nations in terms of ICT products use and diffusion in SSA (Hamilton, Jensen, & Southwood, 2004; Mbarika, Jensen, & Meso, 2002; Mbarika, Kah, & Keita, 2004; NITDA, 2001). Relatedly, the spread of cyber cafés in the country may be helping to popularize the Internet, which in turn could enhance e-business adoption (Ajakaye & Kanu, 2004). The teledensity (number of telephones lines per one hundred inhabitants) for Nigeria has been improving; for example, it rose from 0.5 in 1999 to 2.0 in 2002 (Ajayi, 2003). The present teledensity rate is even better following the deregulation of telecoms industry with licenses being granted to several operators. The sector also received foreign direct investment (FDI) of U.S. $4 billion. Hitherto, the Nigerian government has been the sole provider of telephony to Nigerians (Ajayi, 2003; Hamilton HWDO,¿QHGR ,QWKHVDPHYHLQWKH

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current Nigerian government is promoting e-business among SMEs in its National IT Policy, which ZDVLQDXJXUDWHGLQ$MD\L,¿QHGR 2004). All the aforementioned facts informed the choice of Nigeria as an intriguing county in SSA to investigate e-business adoption. Moreover, many parts of SSA have far less infrastructural and political support for IT-related initiatives or any e-business engagement (Mbarika et al., 2002, 2004; Odedra, Lawrie, Bennett, & Goodman, 1993; Woherem, 1996). Furthermore, the region of Sub-Saharan Africa (SSA) is home to 32 of the 48 least developed countries in the world, it has a population of about 860 million people, and it is associated with poverty, high illiteracy rate, and chronic underdevelopment characterized by inadequate and poor telecommunications infrastructure, low teledensities, low level of technical skills and poor energy supply (Dutta, Lanvin, & Paua, 2003; ITU, 2004; Mbarika, et al., 2004). Usually, the republic of South Africa is excluded from SSA due to its superior indicators, so are countries in the northern part of Africa. Thus, the overview of the region in which this study is set, is highlighted. The rest of the chapter is organized as follows: The following section presents a review of literature on e-business adoption and the theoretical framework of the study. After the Literature Review, the research method and context is discussed. 7KH¿QGLQJVDUHSUHVHQWHGLQWKHUHVXOWVVHFWLRQ The implications and discussions are dealt with in the Discussions and Implications section. The concluding part of the chapter is presented in the Conclusion section.

LITERATURE REVIEW: E-BUSINESS ADOPTION BY SMES In the IS domain, Rogers’(1995) diffusion of innovations theory has been used by researchers

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

in studying the adoption of new innovations and technologies and that theory forms the bedrock for the theoretical model used in this chapter. With respect to e-business adoption by SMEs, Scupola (2003) provides a summary of literature on such studies. Among the studies she discussed are those by Iacovou, Benbasaat, and Dexter (1995) wherein organizational readiness, external pressure and the SHUFHLYHGEHQH¿WVRIWKHWHFKQRORJ\DUHYLHZHG as factors affecting the adoption of ICT by SMEs. Also, Thong and Yap (1995) studies the impact of organizational and environmental factors on e-business adoption with emphasis on the role of &(2VFKLHIH[HFXWLYHVRI¿FHUV ,QDVLPLODUYHLQ Walczuch et al. (2000) compiled a list of barriers to Internet commerce adoption by small business in Holland, by citing previous literature; including those by Abell and Lim (1996) among others. Some of the barriers discussed include unfamiliarity with the Web and lack of guidance about it, security issues and so on. Furthermore, Walczuch et al. (2000) also deliberated reasons why SMEs fail to adopt the Internet in their business; some of the reasons they mentioned include high costs, attitude, and so on. Also, Scupola (2003) highlights WKHEHQH¿WVRI,QWHUQHWFRPPHUFHHEXVLQHVV WKDW are similar with those in Walczuch et al. (2000). Examples include reduced costs, more customer satisfaction, distance barrier disappearance, and FRPPXQLFDWLRQHI¿FLHQF\ Of note, a majority of the literature review mentioned above originates from the developed West DQGRIWHQWHQGWRIRFXVRQWKHVSHFL¿FFRQFHUQV of that society. This chapter is not suggesting, in any way, that some of the factors discussed in such literature do not apply in developing countries (including SSA). What we are attempting to point out in this chapter is that due to socioeconomic and cultural differences between the regions, other factors may in fact exist taken for granted, at least in the developed world. An example cited above relates to the prevailing attitude or culture towards commerce in general (see, Okoli, 2003); or even electric power generation, which is a seri-

RXVSUREOHPLQ1LJHULD,¿QHGR2MXNZX  Georgiadou, 2004) and may not be seen as a threat to e-business in the developed West. Additionally, in contrast to many research on e-business/e-commerce adoption and diffusion in the West, where organizations that have actually implemented e-business (or in the process of implementing) DUHVWXGLHGDQG¿QGLQJVRIVXFKUHVHDUFKGLVVHPLnated; this study is not avail of that opportunity. The number of SMEs, for example in Nigeria HQJDJLQJ LQ UHDO HEXVLQHVV²E\ GH¿QLWLRQ²LV limited; and, obtaining information about such companies is not an easy task. As such, the thrust of this article may appear dissimilar with those from the West, in what it sets out to investigate and how it approaches such issues. However, it is worth noting that the situation regarding e-business adoption and diffusion may be somewhat different in multinationals, banks and other large entities in Nigeria (and in the region) due to the availability of resources—human, technical and ¿QDQFLDO7LDPL\X  Notwithstanding, empirical studies are beginning to emerge with focus on the adoption, use, and diffusion of ICT by African SMEs. Prominent amongst such work include those by Heeks and 'XQFRPEH ZKHUH¿QGLQJVDERXW,&7XVH by SMEs in Botswana is deliberated. Likewise, Okoli (2003) assesses e-business outcomes and values in SSA and concludes that the availability of ICT infrastructure amongst other factors affect e-business capabilities in the region. Other studies have investigated the impact of ICT on the performance and growth of SMEs in SSA and found positive relationships (Matambalya & Wolf, 2001; Ojukwu & Georgiadou, 2004). This present chapter adds to these few studies.

The Research Framework The research model used for this study is modi¿HG IURP WKH ZRUN RI 7RUQDW]N\ DQG )OHLVFKHU (1990) and Chau and Tam (1997), which is shown in Figure 1. The model has featured in research

1257

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

Figure 1. Theoretical framework of the research (adapted from Chau & Tam, 1997; Scupola, 2003; Tornatzky & Fleischer, 1990)

External Environment: Culture, role of government, infrastructural support

Organizational Context: Employee IT skills, company size, financial and technological resources

E-business adoption and growth

Technological Context: E-business Barriers, E-business Benefits

on e-commerce adoption elsewhere (see, for example, Lertwongsatien & Wongpinunwatana, 2003; Scupola, 2003). Tornatzky and Fleischer’s (1990) model has three components impacting the adoption and implementation of innovations; namely, factors or items from the technological, organizational and external environments. In this chapter, we are not dealing with the implementation of e-business in SMEs, per se; rather we are interested in how some of the factors from the three mentioned contexts affect the adoption of e-business by SMEs in Nigeria. Importantly, the model is applicable to any organization, unit of analysis and region (Lertwongsatien & Wongpinunwatana, 2003; Scupola, 2003; Tornatzky and Fleischer, 1990).

External Environment In Tornatzky and Fleischer’s (1990) model, the external environment in which organizations

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carry out their business is noted as being crucial. Factors such as customer-supplier relations, government regulations and the attitude or the culture amongst others do impact the adoption of e-business. With regard to Nigeria, a vast majority of the population would, usually, buy its wares from sellers after having tactile contacts and haggling (Okoli, 2003). E-business adoption may face an uphill task here. In addition, there is no strong IT culture in the country (Ojo, 1996) as the country LV\HWWREHIXOO\LQWHJUDWHGLQWRWKH³QHWZRUNHG world” (Dutta et al. 2003; ITU, 2004). The role of the Nigerian government in setting policies for e-society (including e-government and e-business) is only emerging after the inauguration of the national IT policy in March, 2001 (Ajayi, 2003; NITDA, 2001). This effort, though belated, is nonetheless welcoming. Research has shown that government policies are vital in the diffusion of e-business (Damsgaard & Lyytinen, 1996). Moreover, Nigerians expect those in authority

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

to champion causes or issues including those relating to IT innovations (Anandarajan, Igbaria, & Anakwe, 2002). The telecommunication infrastructure that is a sine caveat non for e-business development is in a sorry state in Nigeria (ITU, 2004). Also, electric power generation is poor in Nigeria. Power generation is taken for granted in the developed West and perhaps never mentioned in IS literature as having any impact on e-business adoption.

Organizational Context This is manifest in the overall quality of the human resources such as the level of education, training and so on available to the enterprise. Iacovou et al. (1995) contend that the level of IT sophistication affects e-business adoption. Likewise, employee IT skills or knowledge, the size of the organizaWLRQ DQG WKH DYDLODELOLW\ RI ¿QDQFLDO UHVRXUFHV DUHRWKHUIDFWRUVWKDWPD\LQÀXHQFHHEXVLQHVV adoption and diffusion. Regarding SMEs organizations in Nigeria, the level of sophistication that is required to enhance the adoption of ebusiness is lacking in the county; such skills are most likely to be found in larger and well-funded organizations in the country (Anandarajan et al. 2002; Tiamiyu, 2000). Lack of general IT skills and illiteracy among the population is rife and could affect e-business adoption (Ajayi, 2003; Dutta et al. 2003; Ojukwu & Georgiadou, 2000; World Bank Group; 2004).

Technological Context In this chapter, the technological context is used to highlight the impact that an innovation such as e-business would have on the SMEs adopting—or planning to adopt it—against the backdrop of their XQGHUVWDQGLQJRIWKHEHQH¿WVDQGEDUULHUVRIVXFK an innovation. Importantly, several studies in the GHYHORSHG:HVWKDYHLQYHVWLJDWHGWKHEHQH¿WVRI ICT for SMEs (Beck et al., 2003; Poon, 2002; Poon & Swatman, 1997), the satisfaction derived

by SMEs from the use of IT in their organizations (see, Beck et al., 2003; Poon & Strom, 1997) and the barriers to adopting e-business. Some of the EDUULHUVDQGEHQH¿WVWKDWDUHXVHGLQWKLVFKDSWHU come from the work of Walczuch et al. (2000). 6HH7DEOHVDQGIRUGHWDLOV,QWKH³WHFKQRORJLcal dessert” of Africa (Odedra et al., 1993) a few exploratory studies and developmental reports have attempted to present perspectives of the EHQH¿WV DQG EDUULHUV ZLWK UHJDUG WR WKH XVH RI ICT by SMEs on the continent. Some of those are discussed below:

Barriers to E-Business Adoption in SSA Generally speaking, some of the barriers to the adoption e-business (or, the use of ICT by SMEs) that are mentioned in literature focusing on organizations in the developed world also resonate in SSA. Such factors amongst others include inadequate awareness or lack of knowledge, HTXLSPHQWFRVWVDQGODFNRI¿QDQFH,QSDUWLFXlar, some researchers including Duncombe and Heeks (1999, 2001); Henten, Falch, and Anyimadu (2004); Mead and Liedholm, (1998); Matambalya and Wolf (2001); Oyelaran-Oyeyinka and Adeya, (2004); and Ojukwu and Georgiadou (2000) have provided relevant insights. For example, DunFRPEHDQG+HHNV FODVVL¿HGEDUULHUVRI,&7 use by African SMEs under two main categories; namely, the macro and the micro factors (see also, Iyer, Taube, & Raquet, 2002). The former deals with overall socioeconomic and technological hindrances and the latter revolves around the limiting factors facing SMEs in the context of SSA. The barriers that Duncombe and Heeks (1999) found as to why SMEs in Botswana do not adopt the Internet in their business include: • • •

Lack of money Lack of skills or knowledge Lack of technological infrastructure, e.g. telecommunications, electricity supply

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Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

• ‡

Lack of awareness of the business environment and how to take advantage of it. /DFNRI³FULWLFDOPDVV´)HZORFDOSHRSOH organizations use computers/e-mail and are unable to engage in meaningful e-business

3RYHUW\LVSHUKDSVWKH¿UVWEDUULHUWRWKHDGRStion and diffusion of ICT by SMEs in SSA. The World Bank (2001, p. 38) report provides the dire VWDWHRIDIIDLUVZKHUHLWVWDWHV³,Q$IULFDVORZ growth increased both the share and the number of the poor over the 1990s; Africa is now the region with the largest share of people living on less than U.S. $1 per day.” As such, many SMEs in the region cannot afford telephones or procure connectivity for their business and the use of the Internet for business is marginal (Henten et al., 2004; Oyelaran-Oyeyinka & Adeya, 2004). The ongoing campaign for funds for African SMEs from international sources is commendable (Anonymous, 2004; ADF, 2004; Nweke, 2004). Unfortunately, the priority of many developing nations tends to be on other socioeconomic matters rather than with the diffusion and applicability of ICT by SMEs (Castells, 1999); thus, it remains to be seen if such funds would actually assist ebusiness initiatives, in particular. The low levels of technical expertise that the educational institutions in SSA turn out may not be amenable to the adoption and implementation of e-business (Odedra et al., 1993; Woherem, 1996). Relatedly, the telecommunication infrastructure in SSA is appalling. Sadly, the communication systems in SSA are built to focus on the external rather than internal communications. This is the legacy of colonialism, which is perhaps to blame for such unpleasant facts (see, Korpela, 1996). For example, it is somewhat easier to place a call to a European city, say London or Paris than for calls to go through two SSA cities, say Dakar and Lagos (Henten et al., 2004). By the same token, the technical abilities of SMEs in many SSA countries, including Nigeria is inadequate or

1260

LQVXI¿FLHQWWRIDFLOLWDWHVPRRWKHEXVLQHVVDGRStion or sustenance (Odedra et al., 1993; Ojo, 1996; Udo & Edoho, 2000). A recent research pointed RXW WKDW ³WKHUH LV D VWURQJ DVVRFLDWLRQ EHWZHHQ WKHFRPSOH[LW\RIWKH¿UPOHYHOHWHFKQRORJLHV and the level of national technological capability” (Oyelaran-Oyeyinka & Lal, 2004). The technological capacity in SSA is abysmally poor; hence the discouraging statistic regarding ICT use in SSA—and for its SMEs—(Dutta et al., 2003; WSIS, 2004). Realistically, the prevailing situation OLPLWVWKH³FULWLFDOPDVV´QHHGHGIRULQQRYDWLRQV such as e-business to thrive in the region.

3RWHQWLDO%HQH¿WVRIE-Business to SMEs in SSA 7KHEHQH¿WVRI,&7IRU60(VDQGWKHDGRSWLRQ of e-business reported in the developed world LQFOXGHLQFUHDVHGHI¿FLHQF\LPSURYHGFXVWRPHU relationships and service, lower costs, and higher information quality to mention but a few (Abell & Lim, 1999; Chaffey, 2002; Iacovou et al., 1995; Kalakota & Whinston, 1998; Poon & Strom, 1997; Poon & Swatman, 1997; Premkumar, Ramamurthy, & Crum, 1997; Walczuch et al., 2000). With respect to Nigeria and other SSA countries, the IROORZLQJEHQH¿WVPD\EHDFFUXDEOH •

Improved knowledge and better supply chain management: The commonest problem to SMEs in SSA relates to lack of information and knowledge about the market, poor communication, uncertainties in supply, poor quality and seasonal impacts of caused by excessive stocks (Singh, 2000). By the same token, the issue of information asymmetry, which may lead to high transaction costs and even market failure, is insidious (Matambalya & Wolf, 2001). E-business engagement could alleviate some of these problems. Recently, some ICT-related initiatives have been developed to help improve the provision of demand information for businesses and

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

•

•

•

entrepreneurs in the developing countries (see, Duncombe & Heeks, 1999). It is hoped that such initiatives could help provide an enabling environment for better management of knowledge that enhances better management of the demand-supply chains of SMEs in the region. The ability to adopt ICT (including the Internet) by SMEs in Nigeria (and SSA) could have a catalytic effect on improving the IT sector in the region. This could generate the critical mass discussed to be lagging in the region. Fortunately, many SSA governments have commissioned bodies and agencies to help small businesses with the deployment of ICT (and the Internet) in their operations. In Nigeria, NITDA (National Information Technology Development Agency) does that IXQFWLRQ,¿QHGR1,7'$  Innovations through e-business: The innovative mind that saw the birth of the Yahoos, Dells, and eBays of this world could be copied in Nigeria (and in other SSA countries). The generated opportunities in employment, revenues and so on could hasten the socioeconomic development of the region. Of note, some cooperatives in East Africa have already started getting themselves organized for using the Internet for commerce. See for example: http://www.giftofafrica.com/. The opportunity for B2G (Business-toGovernment) in Nigeria may emerge as more SMEs adopt ICT (and the Internet) in their operations. The cost advantages and transparency that electronic activities can engender is enormous to both the government and SMEs in the region. For example, access to government information LVHQKDQFHGWD[DWLRQSURFHGXUHVVLPSOL¿HG and so on. This may be revolutionary in a region noted for its endemic corruption (World Bank Group, 2004). For instance, the avenue for bribes—given to corrupt functionaries—may be blocked as e-business

•

•

opens up electronic transactions between SMEs and governments. The government of Mauritius has already implemented a successful online taxation system for business in that country (Duncombe & Heeks, ,¿QHGR  Improved internal operations: The adoption of e-business at the micro level could help ¿UPVLPSURYHWKHTXDOLW\RIWKHLULQWHUQDO services. In the developed world, such benH¿WVIRU60(VKDYHEHHQZLGHO\UHSRUWHG (see for example, Lockett & Brown, 2003; Premkumar et al., 1997; Thong & Yap, 1995). The world at your feet! This is the greatest EHQH¿WWKDWHEXVLQHVVFDQRIIHU60(VLQWKH developing countries (Travica, 2002). In light of the less favorable prospects for SSA in the world trade (World Bank, 2001); SMEs adopting e-business may help bridge the gap as greater international trade is enhanced with the outside world. Such exposures could bring about new skills and standards that could help African SMEs integrate within the global networked economy.

Research Method and Context The main data for the study was collected through two contact persons in Nigeria. Previously, these contact persons acting as research assistants had worked with the author on a similar project. Therefore, their experience in data collection is not in doubt; moreover, they are postgraduate students. Contact person has been used by other researcher(s) for data collection, including in Nigeria (see for example, Anakwe, Anandarajan, & Igbaria, 1999). The contacts were instructed to collect data for this study by distributing 100 questionnaires to randomly selected SMEs—acFRUGLQJWR60(GH¿QLWLRQXVHGLQWKLVFKDSWHU²LQ three Nigerian cities; namely, Lagos, Ibadan, and Port-Harcourt. The selected cities are among the large commercial cities in the country; therefore,

1261

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

it is more likely that SMEs in these cities may have some exposure to some ICT usage in their businesses; or at least, in the process of adopting some e-business initiatives. There is no preference given to any particular industry. As this is an exploratory study we are hoping to elicit the views of proprietors and supervisory/managerial employees of SMEs in the country, on certain issues operationalized on a two-page questionnaire. It is worthy to point out that in Nigeria; WKHUHLV³XUEDQUXUDOGLYLGH´ZLWKUHJDUGWRWKH use of ICT facilities (Ajayi, 2003). ICT facilities are almost nonexistent in the rural parts of the country. This informed our choice of only SMEs in large cities. Further, the author sent out 15 questionnaires, as a Microsoft Word attachment, to similar entities involved in SME in Lagos and Ibadan; all these are commercial cities in Southern Nigeria. The author decided to collect the additional data personally for the purpose of data triangulation. To ensure YDOLGLW\RIWKH¿QGLQJVWKHDXWKRUFRQGXFWHGIROlow-on interviews with some of the respondents. On the whole, in the both instances—through contacts on the ground and e-mail collection—63 usable questioned were obtained. Notably, 54 were received on the ground and 9 through e-mail attachments. This represents an effective response rate of 54.8%, which is good for a study such as this. Of note, judgmental sampling process is used in selecting respondents. This approach involves the researcher(s) handpicking his respondents due to his/her judgment. In this study, requests were made to key informants in the participating SMEs, and such include the proprietors and other knowledgeable employees holding supervisory and managerial positions within their organizations. Key informant technique has been used in IS literature to collect data from key personnel in functional areas such as marketing, accounting and so on (see Bradford & Florin, 2003). This study got responses from such personnel—one for each SME.

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The maximum number of employees in the SMEs sampled in this survey is 186 and minimum is 1. The breakdown is in Table 1. Overall, the viewpoint of 22 (35%) proprietors and 41(65%) supervisory/managerial employees is used. Each participant was given or sent the questionnaire developed with inputs or items from previous studies relating to Internet commerce or ebusiness adoption (Duncombe & Heeks, 1999; Matambalya & Wolf, 2001; Oyelaran-Oyeyinka & Adeya, 2004, 2000; Walczuch et al., 2000). The questionnaire also has a part for open-ended feedback. Participation was voluntary with a SURPLVHWRVKDUH¿QGLQJVZLWKSDUWLFLSDQWV0RUH importantly, non response bias was assessed by using a method similar to those recommended by (Armstrong & Overton, 1997) where means scores of response are compared. In this instance, the responses received by e-mail attachments are compared with those received on the ground (see DOVR'H/RQH 1RVLJQL¿FDQWGLIIHUHQFHVLQ means between the two sets of data collection are observed; thus indicating there is no evidence to suggest bias attributable to non-responses. There were no noticeable outliers in the data, assessed IURP KRZ WKH UHVSRQGHQWV ¿OOHGLQ LWHPV RQ the questionnaire. Basically, the questionnaire requires each participant to indicate appropriate choices on relevant statements about the extent to which they agree/disagree with items anchored on a Likert-type scale. Demographic information is also collected. See Tables 4 and 5 below for the detail. The questions anchored on the Likert-type scale got analyzed using mean analysis and percentages on statistical software; namely, SPSS 10.0 and the qualitative feedback from the open-ended part of questionnaire and interviews DUHDOVRXVHGWRLOOXVWUDWHWKH¿QGLQJV Nonetheless, there are limitations to this study; ¿UVWO\WKHVDPSOHVL]HXVHGLVVPDOODQGPD\QRW be representative. More so, all the SMEs in this study came from a region of the country—the South. The viewpoints from other parts of the

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

7DEOH'HPRJUDSKLFSUR¿OHRIWKHUHVSRQGHQWV Type of organization Retail / Sales Light Engineering (Metal) Business Centre Agro-related business Education Confectionary / Bakery Import / Export business Constructions Oil Support Services Pharmacy Marketing / PR company Computer/IT training school IT consultancy Others

Frequency 5 3 7 2 3 4 3 1 3 5 7 6 3 11

Percent 7.9 4.8 11.1 3.2 4.8 6.4 4.8 1.6 4.8 7.9 11.1 9.6 4.8 17.2

Total Age: Less than 25 26 – 39 40 – 55 56 - 67 Gender: Female Male

63

100.0

8 30 14 11

12.7 47.6 22.2 17.5

16 47

25.4 74.6

Education: Primary / Secondary University Graduate Others

7 36 20

11.1 57.1 31.7

Organization Size: 1 -10 employees 11 – 49 employees 50 – 250 employees

32 19 12

50.8 30.2 19.0

country may differ. Secondly, the diversity of the participating SMEs; namely, operations and VL]HRIWKHUHVSRQGLQJ¿UPVPLJKWKDYHLPSDFWHG WKH¿QGLQJV,WLVSRVVLEOHWKDWWKHUHPD\EHVRPH industries where the use of ICT or the adoption e-business may not be crucially important; at

least, in the present day Nigeria with low IT skills, resources and awareness. Yet, this exploratory study did not seem to make any distinctions in VRIDUDVDQ60(PHHWVWKHGH¿QLWLRQFULWHULRQ Thirdly, response bias may exist; for example, in relation to age, educational level, gender and

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Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

Table 2. The Internet and SMEs in Nigeria

Preference for conducting business: Face-to-face Telephone / fax The Internet Others Does your business have a web page? Yes No Are you planning having a web page in the near future? Yes No Undecided Missing data Does your business have Internet access? Yes No Missing data Which one in particular? Email WWW (web page) Intranet / extranet Others Missing data How often do you use the Internet (email, WWW etc.)? Very often Often Sometimes Never used it Where do you (and your business) access the Internet? Own business premises Cyber café Public places (library etc.) Friend’s Other places Accepting the Internet as a source of business and business information Surely Not too sure It cannot be No comment

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Number (N)

Percent (%)

63 29 14 11

100 43 22.2 17.5

5 58

7.9 92.1

51 4 4 4

81 6.3 6.3 6.3

57 4 2

90.5 6.3 3.2

53 5 2 2 1

84.1 7.9 3.2 3.2 1.6

35 23 3 1

56.5 37.1 4.8 1.6

8 49

12.9 79

1 2 2

1.6 3.2 3.2

56 5 1 1

88.9 7.9 1.6 1.6

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

VRRQWKDWFRXOGKDYHLQÀXHQFHGWKHUHVSRQVHV received. Lastly, the use from two sources may have impacted the results of this study.

FINDINGS AND RESULTS The response provided by the participants is provided in Table 2. All the participants in this study accepted that they prefer doing business face-to-face with their customers. Of which, 43% also picked the telephone/fax as a medium by which business could EHFRQGXFWHG7KLVLVFRQVLVWHQWZLWK¿QGLQJVE\ Duncombe and Heeks (1999), where direct contact with customers is regarded as the most effective method in business dealing for SMEs in Botswana. Though, in that report 70% use the telephone/fax, which is more than what is obtained in this study. This difference is perhaps explained by the more favorable telecommunication and infrastructural indicators for southern parts of Africa (ITU, 2004). In this study, only 22.2% indicate they could use the Internet for doing business, in addition to faceto-face dealings. This might be a result of social factors. To illustrate this point, a proprietress RIDFRQIHFWLRQDU\EXVLQHVVFRPPHQWV³,PDNH wedding cakes and also participate in the [wedding] ceremonies; my presence is a must for my business…The Internet can’t help my business.” Further, some scholars commentated about the sociocultural imperatives that might somewhat LQÀXHQFHWKHQHHGWRKDYHface-to-face business dealings in SSA (see for example: Ojo, 1996; Okoli & Mbarika, 2003; Sachs & Warner, 1997; Udo & Edoho, 2000; Woherem, 1996). Essentially, the societies in SSA thrive on informality in contrast to the mechanistic preponderance that may exist in the West (Ojo, 1996). Also, the fear of using credit cards due to fraud or lack of experience with such facilities are reasons why online business may be lagging in the region (Ajakaye & Kanu, 2004; Chitu, 2003; Travica, 2002). Regardless, DERXW  RI WKH UHVSRQGHQWV ³VXUHO\´ DFFHSW

that the Internet could be a source of business and business information. Likewise, assess to the Internet, in particular the e-mail seems to be from cyber cafés. Very few organizations in this sample indicated that they have facilities such as intranets and extranets. With respect to Web page ownership, only 7.9% of our participants have such a facility. A closer look reveals that entities directly involved in the technology-related business responded to having such Web pages. In contrast, evidence from the developed countries, show pervasive use and ownership of Web pages by businesses—small and large (Beck et al., 2003; Lockett and Brown, 2003). In that respect, Walczuch et al. (2000), ZULWH WKDW ³ RI 'XWFK ¿UP VPDOO EXVLQHVV had their own Web site by February 1999.” In the UK, the body tasked with promoting the spread of e-business by SMEs in the country has long overtaken the target of getting 1.5 million SMEs online. Furthermore, 50% of our respondents plan to have Web pages in the future. Realistically, this study indicates that SMEs in Nigeria are yet to get WKH³K\SH´$O4LULP FLWHV.DODNRWDDQG Robinson (2001) where the phases of e-commerce HYROXWLRQDUHKLJKOLJKWHG7KH¿UVWSKDVHLQYROYHV SMEs having some sort of Web presence regardOHVVZKHWKHUWKH\NQRZZKDWWKHEHQH¿WVDUH7KH study suggests that a majority of Nigerian SMEs are yet to get on this initial phase of e-business HYROXWLRQOHWDORQHH[SHULHQFLQJWKH¿QDOVWDJH of using online business to strategically increase SUR¿WVDQGFXVWRPHUYDOXH Regarding access to the Internet, about the same number of people in this survey responded to having Internet access, which is similar to the results in Duncombe and Heeks’ (1999) study. Fifty-seven percent of our responding SMEs have Internet access, of which e-mail is the commonest—slightly more than half of the respondents have/use e-mail. Approximately XVHWKHHPDLO³YHU\RIWHQ´DQGXVHLW ³RIWHQ´ $QG WKH UHVXOWV LQGLFDWH WKDW ,QWHUQHW access for SMEs in Nigeria seems to be from

1265

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

QRWHV ³:H XVH WKH ,QWHUQHW LQ FRPPXQLFDWLQJ with our local customers and overseas partners as well; if for example, we want to check out and order some products.” In general, the results in Table 3 show that those involved with small business in Nigeria search Web pages and conduct research (business-related or otherwise) more than any other activities. They also randomly search the Web for information, which has highest area of usage for the Internet by our respondents. This evidently is consistent with anecdotal evidence of what Nigerians do in the cyber cafés (Ajakaye & Kanu, 2004). Moderate usage is seen for activities relating to offering information for customers, internal communication, contacting governmental agencies and receiving order from customers. The least areas of usage for the Internet by Nigerian SMEs concerns actual e-commerce, e-banking and entertainment purposes. Oyelaran-Oyeyinka and Adeya (2004) had similar breakdowns in their study.

cyber cafés as in other SSA countries (OyelaranOyeyinka & Adeyas, 2004; Mbarika et al., 2002). Mbarika, Kah, and Keita (2004) have discussed the diffusion of cyber cafés in SSA as the possible signs of better tomorrow in opening Africa up to the rest of the world. The current situation of Internet access from cyber cafés in Nigeria is encouraging (Ajakaye & Kanu, 2004) following the liberalization policy in the telecommunication sector (Ajayi, 2003). Other sources through which the Internet could be accessed by Nigerian SMEs include own premises, which incidentally is found among medium-sized organizations, and as was mentioned above, among technological-related business. Public access is not common. Overall, about 30% of the respondents use the Internet to promote their services and product. A follow-on interview revealed that a few of them occasionally communicate with suppliers especially partners (foreign) using e-mails; in addition to participating in online yellow pages registration and so on. A respondent working for an oil services company

7DEOH7KHVSHFL¿FXVHRIWKH,QWHUQHWE\60(VLQ1LJHULD What does your business use the Internet for? Promotion of product and services Searching for web pages Randomly looking for information Obtaining information from suppliers Offering information to customers Contacting governmental agencies Internal communication Receiving inquires/orders from customers Research purposes Entertainment E-banking Advertising E-business / e-commerce Others

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Frequency

Percent (%)

21 43 58 28 16 17 11 9 42 5 3 0 3 24

33.3 68.3 92.1 44.4 25.4 27 17.5 14.3 66.7 7.9 4.8 0 4.8 38.1

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

Furthermore, the respondents indicated the extent to which they believe the Internet could EHQH¿WWKHLUEXVLQHVVHV7KHLWHPVDUHDQFKRUHG on a Likert-type scale ranging from strongly agree (5) to strongly disagree (1). The result is shown in Table 4. )LUVWWKHEHQH¿WDVVRFLDWHGZLWKUHGXFLQJGLVtance barrier and facilitating access to international markets rates highest. Also, our respondents are of the view that the Internet would allow them to gather useful data, increase their productivity and sales in that order. Communicating with partners and suppliers rated well for our sampled SMEs. Lowering of their costs of acquiring new customers and obtaining information from government VHHPWREHSHUFHLYHGDVDOHVVSRWHQWLDOEHQH¿WRI using the Internet by our sampled SMEs. In the same vein, the reasons for not using the Internet by SMEs in Nigeria that was rated by our UHVSRQGHQWVLQGLFDWHGWKDW³ODFNRI,7VNLOOVIRU e-commerce development” as the most crucial. This harks back to the general limitations for the region as deliberated in the IS literature by PDQ\VFKRODUVVHH,¿QHGR2GHGUDHWDO 1993; Ojo, 1996; Ojukwu & Georgiadou, 2004; Oyelaran-Oyeyinka & Lal, 2004; Woherem,

1996). The next factor in the relative ranking order LV ³¿QDQFH´ ZKLFK %HOLDPRXUQH/XW]   contends as the major determinant of ICT diffusion in developing countries. The cost of buying computers and other ICT equipment is thus linked with this reason. One manager working for an Agric-based business made comments regarding FRVWVRISURFXULQJ,&7HTXLSPHQWDVIROORZV³7R do buying and selling online, our company needs facilities [computers, telephones etc.]; we’re a small business, we can’t afford to invest such huge VXPVZKHQLQIDFWRXUEXVLQHVVFDQEHQH¿WIURP this spare cash.” In the same fashion, a majority of the feedback received indicate that computer [the Internet] usage in business is not a norm for businesses in the country—low critical mass. 6LPLODUO\ ³WHFKQLFDO FRPSOH[LW\ RI XVLQJ IT in business,” which plagues a majority of small business everywhere, also ranked highly as a hindrance, here. To illustrate this point, D IHHGEDFN IURP DQ ,7 FRQVXOWDQW UHDGV ³7KH IT market place in Nigeria is still growing; for example, we ourselves in this business are only beginning to build Web pages for ourselves and others, just imagine what can others [without the IT skills] do with the Internet … My inference

7DEOH7KHEHQH¿WVRIWKH,QWHUQHWIRUSMEs in Nigeria

%HQH¿WV Reduce barrier associated with distance Allow us to reach international markets Effective for our data collection effort Increase our productivity Communicate with partners / suppliers Increase our sales Engage in e-commerce / e-business Increase our customers’ satisfaction Lower our cost of acquiring customers Obtain information from govt. and others

Min. 3 3 2 1 1 3 1 2 1 1

Mean 4.84 4.41 4.35 4.25 4.24 4.00 3.71 3.51 3.49 3.48

Standard deviation .41 .75 .70 .84 .93 .76 1.24 .84 .74 1.16

Max. 5 5 5 5 5 5 5 5 5 5

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Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

of the effects arising from emerging technology and business models is that it may take time to consolidate as customer knowledge, IT support and infrastructure improve in Nigeria.” This remark underscores the limitations of technological environment in Nigeria. The cost of owning and subscribing to telephones lines in Nigeria rates highly as a reason for not having the Internet by Nigerian SMEs. In fact, SSA countries are among the most disadvantaged in the world on such indictors (Dutta et al., 2003; ITU, 2004). Further, the policy of the government on e-business being unclear also ranked moderately high. Other moderately ranking reasons include factors relating to energy supply, knowledge and awareness, suitability for business and security reasons. A respondent’s comments

above expressed doubts as to how the Internet in KHUEXVLQHVVFRXOGEHRIDQ\VLJQL¿FDQFHDQRWKHU manager/co-owner of a Business Center notes WKDW³,I\RX>RQH@GREXVLQHVVZLWKWKH,QWHUQHW would NEPA [National Electric Power Authority] understand and improve power supply?” She mentioned that due to the poor power supply, her business had to procure a generating plant to provide electricity. Lastly, the slowness of the Internet DQGWKHGLI¿FXOW\ZLWKLWVXVHUDQNHGDPRQJVWWKH least reasons why Nigerian SMEs do not have the Internet in their business operations. In general, the study by Walczuch et al. (2000) with respect WREDUULHUVDQGEHQH¿WVRI,QWHUQHWFRPPHUFHIRU a developed nation—Holland—in the late 1990s is comparable with some of results in this study. See Table 5. This may suggest a commonality

Table 5. Reasons for NOT having the Internet used by SMEs in Nigeria Reasons for NOT having the Internet used in your business Lack of IT skills for e-commerce development *HQHUDOODFNRI¿QDQFH Too expensive to buy computers Technical complexity of using IT in business Telephone costs is too high Internet subscription fee is too high

N 63 63 63 63 63 63

Min 2 3 3 3 3 2

Mean 4.84 4.43 4.25 4.11 4.10 3.97

Std dev. .54 .78 .74 .79 .89 1.08

Max 5 5 5 5 5 5

Not clear government policy and support Poor energy (power) supply Not many of many our customers use the Internet Not suitable for our business The Internet is not safe for our business 'RHVQRWOHDGPRUHHI¿FLHQF\RUORZHUFRVWV Lack of time The Internet is too slow 7KH,QWHUQHWLVWRRGLI¿FXOWWRXVH Does not lead to more sales in our business Never thought about it

63 63 63 63 63 63 60 63 63 63 57

2 2 1 1 1 1 2 1 1 1 1

3.97 3.87 3.60 3.49 3.32 3.14 3.08 2.89 2.75 2.62 2.25

1.15 1.11 1.01 1.03 .76 1.12 .79 1.32 1.29 .73 .93

5 5 5 5 5 5 5 5 5 5 5

Likert scale ranging from strongly agree (5) to strongly disagree (1)

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Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

LQWKHSHUFHSWLRQRIWKHEDUULHUVDQGEHQH¿WVIRU SMEs with regard to Internet commerce for both developing and developed nations.

DISCUSSIONS AND IMPLICATIONS So far, we have concentrated on bringing to the fore, the factors affecting the adoption of e-business by SMEs in Nigeria. To that end, we used the framework in Figure 1 to guide our discourse. This study seems to suggest that preparedness or readiness for e-business is low for SMEs in Nigeria. The business culture of Nigerians may have an impact on e-business adoption and growth in the country. Notably, the desire to engage in faceto-face business dealings surpasses the intent to use ICT (telephone, facsimile, the Internet). This revelation may not be conducive to the emergence of e-business. Clearly, our responding SMEs seem to be cognizant of the fact that the Internet could facilitate the breaking down of barriers due to distance, and open the world beyond to them. This fact suggests that the external contextual factor such as the norms, traditions or culture should be looked into more closely if any e-business engagement is to be widely adopted by Nigerian SMEs. +RZHYHUWKLVVWXG\LVQRWVSHFL¿FDOO\GHVLJQHG WR¿QGRXWWKHPRVWVLJQL¿FDQWIDFWRUPLOLWDWLQJ against e-business adoption in Nigeria. Nonetheless, the viewpoints held by our respondents regarding business dealings seem to suggest that face-to-face encounters are widely preferred. Furthermore, with regard to the state of infrastructural facilities such as power generation in Nigeria, it was seen that the prevailing condition is far from being conducive or favorable to e-business diffusion and adoption; at least among SMEs. With respect to the organizational context factors, it was found that the sorts of skills and awareness required for e-business adoption and growth among Nigerian SMEs is lacking or not widely available. Though, such skills may be easily found in larger SMEs, usually with much more

¿QDQFLDOUHVRXUFHVDQGVRPHWLPHVLQWHFKQRORJLcal-related industries; for instance, IT-related or oil services. Conversely, smaller businesses, say for example, family-owned or one-man business do not seem to have the knowledge or awareness or even the resources for engaging in e-business. The barriers to adopting e-business in Nigeria stem IURPIDFWRUVUHODWLQJWRJHQHUDOODFNRI¿QDQFH and the lack of expertise in developing e-business. Infrastructural facilities such as Internet access, telephone and computer costs ranked highly as hindrances to e-business adoption. More so, respondents commented as to the seriousness of these factors for e-business adoption or growth in the country. Also, not many of the SMEs in this survey have their own Web pages; perhaps as a direct consequence of the debilitating environment LQZKLFKWKH\¿QGWKHPVHOYHV The capability of the country in terms of technical, infrastructural and educational or awareness endowments is low. Yet, there appears to be some willingness on the part of many a SME to have their own business Web pages. Our data show that some already have such facilities. Apparently, the ownership of Web pages is the starting point of e-business. The external environment in regard of the enabling infrastructure looks promising with ubiquitous cyber cafés in urban centers in Nigeria (Ajakaye & Kanu, 2004). In addition, many SMEs in the country appear to have found good use for the Internet as they carry out information searching and research purposes through it. The question is: What can be done to further encourage its use for e-business purposes in Nigeria? &OHDUO\IRU1LJHULDWKHEDUULHUVDQGEHQH¿WVRI the e-business adoption and growth appear to be closely related; the solution of the barriers could yield positive results in the other. Fortunately, the onus of promoting e-business adoption and growth may rest with the Nigerian government being the most powerful entity in the country. The socioeconomic and cultural underpinnings of the society may readily support the foregoing proposition (see Anandarajan et al.

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Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

2002; Ojo, 1996). Nevertheless, it is worthwhile to mention that the government has realized the import of e-business and regularly promotes ebusiness and e-awareness among SMEs in the country (Ajayi, 2003; NITDA, 2001). The political will to set the stage for e-business adoption and growth, we believe rests with the government in light of the progress seen in the ICT sector when the Nigerian government liberalized its telecoms sector. Enabling infrastructure for e-business must be in place so as to quicken the spread of e-business, which equivocally could help speed up the socioeconomic development of the country (and the region too). More importantly, the effort of the Nigerian government and other SSA governments should be aimed at vigorously sensitizing the populace towards accepting that the information economy is already here; namely, some old ways may have to be done with. Apart from making efforts to improve the infrastructural facilities required for e-business adoption among SMEs in Nigeria, another area that must not be neglected is the need for assimilating new culture towards business dealings. To that end, awareness campaigns and education may be required in helping to spread e-business in the country. This study has implications for both theory and practice. In terms of theory, this chapter has shown that some of the factors mentioned in IS literature regarding e-business adoption (or ICT use by SMEs) may in fact be applicable to SMEs in a less developed part of the world. For example, organizational size, resources, employees’ skills, (CEOs) leaders’ perceptions, infrastructural support (see for example Chau & Tam, 1997; Iacovou et al., 1995; Poon & Strom, 1997; Scupola, 2003; Thong & Yap, 1995) are some of the factors that have been mentioned for SMEs in the developed countries that were also seen to impact the adoption of e-business (or ICT use) by SMEs in Nigeria. This contribution may be useful for the development of theories in e-business research relating to SMEs. Second, this study complements RUVXSSRUWV¿QGLQJVIURPFRPSDUDEOHVWXGLHVRQ

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ICT and SMEs in SSA. In particular, this present study highlights the import of norms, tradition in other studies in the region (Heeks & Duncombe, 2001; Okoli, 2003). Additionally, this article could entice other studies to further investigate the adoption and diffusion of e-business by SMEs in other parts of SSA, as the e-business hype develops. As such, this study could be used as a guideline for such further investigations. Regarding practice, policy makers in Nigeria and other nations in SSA could avail themselves of this study to focus their attention on key items that could be explored in order to engender e-business adoption and diffusion in the region. This chapter FOHDUO\LGHQWL¿HGWKHQHHGIRUFXOWXUDOFKDQJHLQ business dealings, awareness and education as well as the provision of relevant infrastructural DQG¿QDQFLDOVXSSRUWIRU60(V7KHVHDUHDUHDV where governments’ commitment and efforts FRXOGPDNHDGLIIHUHQFH6SHFL¿FDOO\WKH1LJHULDQ government as well as others in SSA could use WKH¿QGLQJVLQWKLVVWXG\DVDEDVLVWRLQFUHDVH their awareness campaigns concerning e-business as an engine of socioeconomic development and sustainability (Castells, 1999; Oyebisi, 2001; 7UDYLFD   $V ZDV QRWHG DERYH HI¿FLHQW LQIUDVWUXFWXUDO IDFLOLWLHV DQG IXQGLQJ ¿QDQFH  could be catalytic in the process. The general lack of IT skills among SMEs can be attenuated through greater government participation. For instance, in Thailand the Ministry of Commerce ³DUUDQJHVIUHHKRPHSDJHZLWK85/HPDLODQG provides seminars and training programs for SMEs” (Lertwongsatien & Wongpinunwatana, 2003, p. 69). The Nigerian government could woo IT multinationals to help provide relevant expertise to SMEs as is the case in the Republic of South Africa (HP, 2002).

CONCLUSION This chapter has attempted to discuss the factors affecting the adoption of e-business by SMEs in

Factors Affecting E-Business Adoption by SMEs in Sub-Saharan Africa

Nigeria. The choice of Nigeria is informed by its economic size relative to other countries in the SSA region and the position of SMEs within its economy. Essentially, this study represents an important step in understanding the factors affecting e-business adoption in one developing region of the world (i.e., SSA). This study is exploratory in nature. Findings of the study indicate that e-business adoption may be hampered by the prevailing norms, traditions or culture that has preference for doing business, face-to-face. As such, the preparedness of Nigerian SMEs for ebusiness may not, at this point in time, be seen as high due to this external contextual factor. Other limiting barriers noted include general lack of ¿QDQFH,7VNLOOVDQGFULWLFDOPDVVIRUHEXVLQHVV engagements. Overall, the infrastructural support in Nigeria is not conducive for e-business, though there are improvements underway. Nevertheless, some SMEs possessing—skills and funds—and some other favorable resources have started ebusiness. In general, the lack of knowledge about HEXVLQHVVEHQH¿WVDQG¿QDQFHIXQGV DUHDPRQJ the contextual factors inhibiting e-business adoption in Nigeria. Notwithstanding, Nigerian SMEs seems to be aware that the Internet could help them reach the world beyond and act as a source of business and business information. There are practical and theoretical implications for this study, which include the need to re-evaluate the commercial practices or values, if any meaningful e-business is to emerge in the country. Secondly, strong government policy and support may be required to provide the enabling environment for e-business. Such efforts may relate to the provision of infrastructural for support e-business engagements. In general, this study also has implications for other SSA countries whose conditions are similar with those in Nigeria. Theoretically, a suggestion that e-business adoption strongly hinge upon external, technological, and organizational contextual factors for all SMEs regardless of regions, may hold. Though the impacts

of such may depend upon regional characteristics. Finally, this chapter only provides an overview to the discourse of e-business adoption in Nigeria, future research may study in depth, using larger sample, the adoption and infusion of e-business in those SMEs in Nigeria that have already started SUDFWLFLQJHEXVLQHVVDQGWKH¿QGLQJVFRPSDUHG with relevant studies in the developed world. This will ultimately enhance our understanding RIWKHIDFWRUVLQÀXHQFLQJHEXVLQHVVDGRSWLRQE\ SMEs, globally.

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This work was previously published in Global Electronic Business Research; Opportunities and Directions, edited by N. Al Qirim, pp. 319-347, copyright 2006 by IGI Publishing (an imprint of IGI Global).

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Chapter 4.18

Intelirel’s Transition to E-Business: Optimizing the Combination of Electronic Data Interchange and the Internet Nir Kshetri The University of North Carolina at Greensboro, USA Satya Jayadev The University of North Carolina at Greensboro, USA

EXECUTIVE SUMMARY Intelirel is a U.S.-based multinational corporation that produces a variety of items with apparel as one of the business divisions. This case provides an overview of Intelirel’s transition to electronic business (e-business) of its apparel division. The company introduced the Electronic Data Interchange (EDI) technologies in the mid-1980s. Before starting the implementation of e-business technologies in the late-1990s, the company conducted extensive surveys to assess the attractiveness and convertibility of its various market segments. The analysis of the surveys indicated that a strategic imperative for the company is to

optimally combine EDI and the Internet so as to UHDSWKHEHQH¿WVRIERWKWHFKQRORJLHV

ORGANIZATIONAL BACKGROUND ,QWHOLUHOLVD86EDVHGGLYHUVL¿HGFRPSDQ\ZLWK operations in over 50 countries. The company has apparel as one of its main business divisions. Intelirel manufactures and markets about three dozen apparel brands worldwide. They include basic, non-fashion apparels in various categories. The company employs different channels of distribution to sell its products. In some cases, it directly sells to the consumers through its

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Intelirel’s Transition to E-Business

factory outlet stores and the Internet. Its massmarket channel includes well known retailers in the global market. Being a manufacturer and marketer of highquality products, Intelirel has priced its products higher than most of its competitors. The company thus competes on product differentiation such as higher quality fabric, well known brand names, and a variety of styles provided to the customers. Table 1 provides additional information about the strengths and weaknesses of Intelirel as well as opportunities and threats facing the company. :HEULHÀ\GLVFXVVWKHPLQWKLVVHFWLRQ Strengths:%HLQJDGLYHUVL¿HGFRPSDQ\ZLWK worldwide operations and a large customer base, Intelirel can enjoy economies of scale and scope in its operations. Another major strength of the company includes its focus on quality products

and services to meet customer expectations. Competing on quality rather than price is of paramount importance in the new economy. Still another strength of the company is its proactive ,7GHSDUWPHQWWKDWKDVSODFHGEXVLQHVVEHQH¿W creation as its mission. Thanks to competent and experienced staff in the IT department, Intelirel KDVEHHQDPRQJWKH¿UVWIHZFRPSDQLHVLQWKH industry to incorporate new innovations in storage, networking and security in its system. Weaknesses: In terms of global competitiveness, U.S.-based apparel companies fall behind their home textile counterparts. The latter groups have stronger brand names and better inventory-management programs (Lloyd, 2000). The industry-level brand problems are worsened by ,QWHOLUHO¶V¿UPOHYHOZHDNQHVVHV1RWZLWKVWDQGing its focus on quality, there are several apparel brands that are more well known than Intelirel’s

Table 1. Intelirel’s online apparel business: A SWOT analysis

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Strengths Competent IT personnel. 'LYHUVL¿HGFRPSDQ\ZLWKEXVLQHVVHVLQDQXPEHU of segments. Product differentiation as selling propositions: better quality fabric, more styles and more choice. Worldwide operations. Huge customer base. Company’s focus on quality services and meeting customer expectations. Opportunities 3RVVLELOLW\RI,QWHUQHW¶VXVHLQUHGH¿QLQJFXVWRPHU expectation. $YDLODELOLW\RI³UREXVWUHOLDEOHDQGXVHUIULHQGO\ color correction” on the Internet. Apparel industry: one of the fastest to adopt ecommerce technologies. Clothing: among the top 3 products bought online during the holiday season of 2004.

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• •

Weaknesses Not strong brand name. Disintegrated e-business model. Products priced more than its competitors. Lack of product awareness among the target segments.

Threats Market attackable from upscale brands. Powerful big retailers as major customers.

Sources: DiMartino (2000, p. 41); Tedeschi (2004); Interviews with an e-business manager at Intelirel; and authors’ research

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EUDQGV$ODFNRIVWURQJEUDQGHTXLW\LVUHÀHFWHG in its brand awareness level which is lower than VRPHRILWVFRPSHWLWRUV$¿QDOZHDNQHVVFRQFHUQV Intelirel’s lack of integration across its business divisions (e.g., apparel and various non-apparel businesses). Since each division has its own ebusiness system, such disintegrated model has hindered the realization of potential economies of scale and scope. Opportunities: The Internet has additional YLUWXHIRU¿UPVLQWKHDSSDUHOLQGXVWU\DYDLODELOLW\ RI³UREXVWUHOLDEOHDQGXVHUIULHQGO\FRORUFRUrection” (DiMartino, 2000, p. 41). These features KDYH UHGH¿QHG FXVWRPHU H[SHFWDWLRQV LQ WKLV industry. Research has consistently shown that apparel is among the top few products in terms of online sales. Threats: $VXUYH\FRQGXFWHGE\*UHHQ¿HOGLQ July 1999 indicated that 56% of the respondents would not buy apparel online because of the concern about not being able to touch and feel (Kelly & Andersen, 2000). The proportion declined to 41% in December 1999 but it is still a substantial proportion (Kelly & Andersen, 2000). Although apparel is among the popular online categories, some big retailers have discontinued online sales of this category. To take one example, Wal-Mart discontinued selling clothing online since 2001 mainly because of high handling costs associated with merchandise returns (Merrick, 2003). As we mentioned earlier, there are other brands that are more well known than Intelirel. The company is thus susceptible to threat from other well known and more upscale brands. Another threat concerns its dependence on powerful retail giants. Some of them are likely to develop their own brands. $VLWZLOOEHFRPHFOHDUVKRUWO\¿UPVLQWKH apparel sectors faced intense competition from retailer giants to adopt electronic data interchange (EDI)1 technologies in the 1980s. Although Intelirel had assimilated the EDI technology by the mid-1980s, the company was relatively slow in integrating the Internet-based e-business technologies. The company failed to realize the

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importance of a full-blown e-business strategy until 1998. A number of factors contributed to Intelirel’s slow start in moving into the Internet. First, like many big companies that have invested in private networks such as EDI, Intelirel concentrated on utilizing the existing technology in a better way. Rob Unger, director of electronic billing and payment at NACHA (http://www.nacha.org/) argues: 7KH>FRPSDQLHV@ZKRGLG(',LQWKH¿UVWSODFH — the Wal-Marts, Sears …are going to continue WRWU\WRPD[LPL]HHI¿FLHQF\ZLWKLQWKHLUSULYDWH networks. (Electronic Commerce News, 2002, p. 1) Second, like many big companies (e.g., Ghosh 1998), Intelirel was slow to realize the importance of integrating the Internet in the business strategy. Intense competitive pressure forced the company to consider combinations of EDI and the Internet. Like many vendors (Radosevich 1997), Intelirel started searching new ways to marry the two technologies: EDI and the Internet. Given several limitations of conventional EDI including high costs associated in responding to customers, experts have argued that EDI must be combined with e-commerce on the Internet, or other measures directed towards enhancing customer services (e.g., McAtee, 1999). Nonetheless, to produce a given combination of differentiators (e.g., advertising, promotion, e-commerce, customer serYLFHVHWF GLIIHUHQW¿UPVFKRRVHGLIIHUHQWOHYHOV of involvement with each technology (Spralls, 2001). This case examines how Intelirel moved into the realization of optimum combination of the two technologies.

SETTING THE STAGE 7UDGLQJUHODWLRQVKLSEHWZHHQWZR¿UPVLVDIXQFWLRQRIWKHGHJUHHRI³¿W´EHWZHHQWKHWHFKQRORJLHV used by them or what Ford et al. (1998, p. 24) refer

Intelirel’s Transition to E-Business

WRDV³WHFKQRORJLFDOGLVWDQFH´0DMRUUHWDLOHUJLants such Wal-Mart, Sears, and JC Penney have HPSOR\HG(',LQDZLGHVFDOH7KHVH¿UPVKDYH forced their suppliers such as Intelirel to do business with them via EDI in order for the latter to remain competitive and be in business. Thanks to such pressure, the apparel industry has employed EDI technologies since the 1980s2. Intelirel was one of the early adopters of EDI in its industry. The Internet’s advent has, however, changed the rules of the game. In addition to the retailers, apparel manufacturers such as Intelirel are facing FRPSHWLWLYHSUHVVXUHWRUHGXFHWKH³WHFKQRORJLFDO distance” with their customers that are becoming increasingly technology savvy. Consider some of the trends in this industry. As early as in 1998, DSSDUHOZDVWKH¿IWKELJJHVWFDWHJRU\LQWHUPV of online sales3. In spite of a small percentage of total apparel sales, Internet apparel sales showed double-digit growth in the U.S. for 1999. Online apparel purchases in the U.S. increased from $1.1 billion in 1999 (Kuntz, 2000) to $3.5 billion in 2000 (Vickery & Agins, 2001). An estimate of the Jupiter Research suggested that online sales of apparel increased by 42% in 2003 to reach $4.7 billion or about 2.3% of total apparel sales (Merrick 2003). During the 2004 holiday season clothing was one of the top three dominant items for online buyers (Tedeschi, 2004). Some estimates suggest that in developed countries like the U.S., over 17% of apparel sales will take place online by 2010 (Newbery, 2004). 7KH,QWHUQHWRIIHUVVHYHUDOEHQH¿WVWREX\HUV and sellers in the apparel industry4. Consumers can use Internet-based models employing online FXVWRP¿WWHFKQRORJ\WRWU\RQFORWKLQJ5. Apparel products are better suited for interactive online presentation than other popular online items such as books or travel (Vigoroso, 2001). Leaders in apparel industry such as Lands End as well as less well known retailers have been extensively employing such technologies. For instance, many of the styles offered by Eshakti.com, a marketer of Indian style clothes, can be customized online

:LOOLDPVRQ &RQVXPHUVFDQDOVREHQH¿W from the availability of clothing and apparel news, trends, and fashions. From the marketers’ perspective, new technologies such as digitized color approval have eliminated many sample steps required in the apparel chain, increased color accuracy and reduced costs (DiMartino, 2000). For instance, True Internet Color technology launched by E-Color ensures that image colors remain the same in all types of monitor or browser (Bobbin, 2001; DiMartino, 2000). Online apparel sellers, however, are required to consider several structural uniqueness of this industry. First, being a time sensitive merchandise, clothing is subject to increasingly shorter consumer buying life cycles. A clothing trend used to last six months to a year until a few years ago. Today, the trend has been reduced to six to twelve weeks before it fades. Second, WKDQNV WR DSSDUHO ¿UPV¶ LQWHJUDWLRQ RI ,7 WKH bar on customer expectations has been raised in this industry (DiMartino, 2000) and all apparel manufacturers are facing pressure to adjust their business processes to account for the changes in customer expectations. There are, however, several limitations in selling apparel products over the Internet. First, the apparel industry is characterized by inconsistent VL]LQJDFURVV¿UPVZKLFKFUHDWHVSUREOHPVUHODWHG WR¿WRUFRPIRUWOHYHOLIFXVWRPHUVEX\RQWKH,QWHUnet (Carr 1999). Second, many apparel marketers have not integrated color technologies. It is thus GLI¿FXOWIRUFRQVXPHUVWRJDXJHFRORUDFFXUDF\ For these reasons, purchase returns for apparel products bought on the Internet are estimated in the range of 25 to 50% forcing a number of apparel companies to pull back on their Internet ambitions in the early 2000s (Vickery and Teri,  7KLUGVRPHEHQH¿WVGLVFXVVHGSUHYLRXVO\ cannot be realized if online sellers fail to consider customer demand for site usability. For instance, customers that have narrow-bandwidth Internet FRQQHFWLRQVFDQQRWEHQH¿WIURPLQWHUDFWLYHDQG multimedia design solutions that require high

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bandwidth Internet access. An analyst of the ForUHVWHU5HVHDUFKDUJXHV³'HVLJQHUVDUHVWDUWLQJ to realize that if the customer cannot accomplish his goals, the designer cannot accomplish his” (Vigoroso, 2001). Given these limitations, apparel manufacturers cannot rely solely on the Internet. Moreover, competitiveness in the new Internet-based economy is a function of an appropriate integration of various upstream and downstream supply chain management technologies such as e-procurement and Vendor Managed Inventory (VMI) (Scannell, Vickery, & Droge, 2000). Intelirel has incorporated the latest supply chain management technologies such as VMI; and Collaborative Planning, Forecasting and Replenishment in its business strategy. As it will be clear shortly, these technologies have improved its inventory management, forecasting and replenishment. These technologies have provided the company IRU PRUH HI¿FLHQW SURGXFWLRQ IDFLOLWLHV WKDW DUH LQFUHDVLQJO\ÀH[LEOHDQGUHVSRQVLYHWRLWVUHWDLOHU¶V needs. These technologies have also accelerated WKH ÀRZV RI JRRGV VHUYLFHV DQG LQIRUPDWLRQ 7KHVHWHFKQRORJLHVKDYHDOVRHQDEOHG¿UPVOLNH Intelirel to gain quicker access to point of sale data on consumer purchases and therefore make more informed stocking and ordering decisions. Before the implementation of e-business solutions, Intelirel customers were placing their orders either using EDI technology or by more traditional FKDQQHOVVXFKDVSKRQHID[RUPDLO0RUHVSHFL¿cally, the customers in the mass market channel placed their orders to Intelirel divisions using EDI technologies. Most small-order customers, on the other hand, used phone, fax, or mail. Arguably the biggest mistake in incorporating e-business efforts in a company is to consider it DV³WHFKQRORJ\SOD\VUDWKHUWKDQEXVLQHVVPRYHV´ 5LINLQ .XUW]PDQS 0DQ\¿UPV that have jumped on to the Internet bandwagon ODFNFOHDUO\GH¿QHGHEXVLQHVVYLVLRQV3XWGLIferently, e-business is just a technology play for

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VXFK¿UPVDQGWKH\UXQWKHULVNRIEHLQJIXUWKHU marginalized. Firms that consider e-business as a strategic business move to change their business SRVLWLRQVRQWKHRWKHUKDQG³GRLWULJKWRUGRQ¶W do it at all” (Rifkin & Kurtzman, 2002, p. 93). Intelirel’s transition to a full-blown e-business was more like a business move rather than a technology play. The company did not consider failure as an option. When the e-business initiative for Intelirel was started, a survey was conducted with its non-EDI customers to assess their convertibility to e-business domain. The analysis of survey data superimposed with the company’s position revealed the following:

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The Internet has the potential to improve communications and services to customers, which are needed to drive sales growth. The company is required to assimilate the Internet in every business function including advertising and promotion, distribution and market research. The survey indicated that conversion of the non-EDI customers into e-business customers must be the top priority at Intelirel in RUGHUWRHQKDQFHRSHUDWLRQDOHI¿FLHQF\DQG to gain competitiveness6. The 650 top customers that accounted for more than half of the company’s non-EDI sales volume should be targeted as the near term strategic focus for the companies’ ebusiness initiatives.

The mission critical activity of transforming Intelirel’s non-EDI customers to e-business channel began in 1999. To receive orders, the company has designed separate systems for EDI and the Internet-based e-businesses. Nonetheless, the company processes orders in one single system. Such arrangement has allowed the company to account for the inherent differences between the standards of EDI and the Internet technologies as well as to produce synergistic advantages.

Intelirel’s Transition to E-Business

CASE DESCRIPTION Early researchers in e-commerce predicted that the FRPSHWLWLYHQHVVRI¿UPVLQWKHQHZ,QWHUQHWEDVHG HFRQRP\LVDIXQFWLRQRIWKH¿UP¶VFDSDELOLW\WR use an optimum combination of e-commerce and EDI technologies (Benjamin & Wigand, 1995; Malone, Yates, & Benjamin, 1987). Although EDI is prohibitively expensive for small and medium sized enterprises (SMEs), this claim still holds true IRUODUJH¿UPV%LJ¿UPVOLNH,QWHOLUHOWKXVULVN losing business with smaller suppliers/customers if they rely only on EDI technologies. Radosevich (1997) argues: Despite the costs, EDI can be extraordinarily costeffective for very large companies such as Sears, Roebuck and Co., Wal-Mart and General Motors Corp., which act as hubs for their thousands of suppliers. However, the suppliers, or “spokes” in EDI parlance, don’t necessarily see the same EHQH¿WV1RWWKDWWKH\QHHGWRLIVSRNHVGRQ¶WVXEmit to hubs’ demands to conduct business by EDI, they lose the business…. [In EDI] the transmission charges are expensive, but the returns ….remain unmeasured. Rapid changes in fashions and requirements of retailer have forced apparel manufacturers to drastically reduce the time taken by their products to reach the end customers (Haar & Reyes, 2002). Many large companies have set up EDI-based stock-replenishment systems which allow them to send sales and inventory data to suppliers and DXWRPDWLFDOO\UHRUGHU³KRW´LWHPV5DGRVHYLFK 1997). Such mechanisms are critical to the producers of apparel, perfume and accessory products (Carroll, 2003; Haar & Reyes, 2002). EDI also dramatically decreases error rates (Radosevich, 1997). EDI however has some limitations related to rigidity and costs, especially for SMEs. Appropriate combination of EDI with the Internet allows companies to exchange information in the value

chain as well as to access customer preference information (Kaufman, 1997). Companies that have a Web-enabled supply chain management solution integrating internal systems and external systems are thus likely to win in the game of the new Internet-based economy (e.g., Hill, 1999; McIvor & Humphreys, 2004). As mentioned earlier, apparel has been one of the biggest sectors in the U.S. retail industry7 and among the fastest to adopt e-commerce technoloJLHV,QWKLVLQGXVWU\HI¿FLHQF\LQWKHGLVWULEXWLRQ FKDQQHODQGRQOLQHDQGRIIOLQHRUGHUIXO¿OOPHQW are keys to success in today’s economy. InternetEDVHG FRPPHUFH DQG (', KHOS ¿UPV DFKLHYH such goals. EDI and the Internet have become two biggest sources of sales for Intelirel. EDI constitutes over two-thirds of the sales orders, followed by HEXVLQHVVDERXWRQH¿IWK DQGWKHUHPDLQLQJLV by phone and fax. Strategic uses of Web-based technologies at Intelirel has provided the company with the necessary edge over their competitors and attracted new customer segments. The company regularly tests its Web sites for security, usability, and performance. The company has also devised a performance metrics system for its Web site8. To manage its Internet advertising and to improve key brand metrics, Intelirel developed a strategic partnership with a major provider of media, technology and services. Intelirel has also chosen a color communication system developed by a reputed color technology provider in the industry.

EDI $VPHQWLRQHGHDUOLHU,QWHOLUHO¶VWRS¿YHFXVWRPers use EDI to transmit orders to the company. These customers send thousands of orders a day making EDI the most valuable tool in terms of generating sales volume at Intelirel. The volume of these transactions make EDI the best choice, as the data feed is automatic and there is no need for human interference in placing these orders.

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Intelirel runs the EDI interface four times a day and thus sends order acknowledgments within a few hours of placing those orders.

E-Business As discussed previously, the Internet has provided WUHPHQGRXVRSSRUWXQLW\IRU¿UPVLQWKHDSSDUHO industry to better serve their markets and increase customer satisfaction. E-business is becoming increasingly popular at Intelirel. The company has been using the Internet in a number of activities including marketing and sales. The company started off by creating Internet portals to accept and process orders. The number of Intelirel customers using this system is increasing rapidly. Intelirel thus restructured its operations to integrate e-business technologies in its business strategies. The company has already converted a VLJQL¿FDQWSURSRUWLRQRILWVQRQ(',FXVWRPHUV to the e-business entity. Many of these customers could not have afforded EDI technologies. IntelirelOne, the consumer division, uses e-business mainly to reach the end-consumers directly through its Web site. The company also uses this channel to advertise its new products and alert the customers on the latest closeout prices and special promotions. Before the existence of this system, closeout prices were conveyed over phone to the biggest distributors and the stock was sold based on the price offered by those distributors. Following the launch of this new system, anyone interested in the company’s products can get such information via the IntelirelOne Web site. Although retailers and distributors also have direct access to this closeout stock, as they can access the information, end-consumers are more likely WREHQH¿WE\GLUHFWO\SXUFKDVLQJDSSDUHOSURGXFWV with Intelirel. The IntelirelOne Web site also helps FXVWRPHUVWR¿QGWKHQHDUHVWIDFWRU\RXWOHWVWRUHV of Intelirel; order products online with the company; track shipping; request Intelirel catalogue, download discount coupons for Intelirel products that are in promotion, and so on.

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Phone/Fax Customers This is a gradually diminishing segment of Intelirel’s customers. As Intelirel is embarking upon various Internet strategies, the focus has been to convert these customers to electronic means of engagement. Intelirel has provided a number of incentives to convert these customers to move to their e-business entity. These include Web-based discounts, free stock tracking, and so on.

Vendor Managed Inventory (VMI)9 As we mentioned earlier, Intelirel has several big retailers as its vendor partners. Exchanging information creates a unique synergy that proYLGHVEHQH¿WVWRERWKSDUWLHV,QWHOLUHOKDVEHHQ DPRQJWKH¿VWLQWKHLQGXVWU\WRDGRSWVRPHRIWKH specialized supply chain services. For instance, Intelirel manages the inventory of some of its retailer customers through its Vendor Managed Inventory (VMI) program. VMI enables suppliers to reduce costs related to production, inventory and transportation (Attaran, 2004). VMI is FULWLFDOLQDQHQYLURQPHQWFKDUDFWHUL]HGE\³OHVV SUHGLFWDEOHGHPDQG´DQG³OHVVIRUJLYLQJEXVLQHVV models” (Sedlak, 2000, p. 81) and in an industry in which logistics has been found to be an important problem (Smailes, Sapienza, Bullock, Kehoe, & Lewis, 1998). The company also works with the vendors in the implementation of CPFR (Collaborative Planning, Forecasting, and Replenishment). Intelirel believes that standardizing the industry’s exchanges of pertinent information, such as sales and order forecasts, will continue to remove cost from WKHVXSSO\FKDLQDQGLQFUHDVHRYHUDOOSUR¿WDELOLW\ By exchanging information such as forecast and replenishment data with their vendor partners through the Web site, the company ensures that they have the right item in the right place. Put GLIIHUHQWO\&3)5WHFKQRORJLHVKDYHIXO¿OOHGWKH company’s needs in creating fast and accurate forecasts for thousands of combinations of styles,

Intelirel’s Transition to E-Business

FRORUVVL]HDVZHOODVUHWDLOHUV$IWHUWKH¿UVW weeks of implementation, the company realized a 2% improvement in retail store in stock, a reduction of 14% in store-level inventory compared to a 32% increase in sales, and an increase of 17% in retail turns on the pilot items. Likewise, CPFR implementation with a major retailer customer in the women’s underwear and hosiery category resulted in sales increases by 45% and a decline in weeks-on-hand inventory by 23%10.

Expectations of the Customer The advent of e-business has drastically increased customer expectations in terms of quick and timely delivery (Dan, Dias, Kearney, & Lau, 2001; Franklin, 2001; Sedlak, 2000; Swaminathan & Sridhar 2003). At the same time, the Internet has created tremendous opportunities for compaQLHVWRSUR¿WDEO\UHGH¿QHFXVWRPHUH[SHFWDWLRQV (Hamel 2001). According to an e-business manager at Intelirel, the company marks quality services and meeting customer expectations as the epitome of e-business transactions. For the retailers, who always depend on the distributors for a better price, Intelirel’s e-business solution is a boon. Most of the company’s small customers have eliminated intermediaries in their transactions with Intelirel as there is more visibility and contact with the manufacturer. The ability to check the prices and order on Intelirel’s Internet portal has facilitated their direct interaction with the distributors. Customers also want to know the status of their orders after it is placed via phone, fax, and mail. Customers now have the ability to track the status of their orders on the Internet. The second important requirement would be the knowledge of new products and promotions released by Intelirel. Due to the large volume of customers, it becomes tedious to alert their entire customer base. Hence, some smaller customers are unaware of the promotions or new products offered by Intelirel. Some of the customers want to know the inventory of

DVSHFL¿FSURGXFWEHIRUHSODFLQJDQRUGHUIRUWKDW product. Finally, the customers want to order at their own preferred time instead of ordering when the service representatives are available. Even after faxing the orders, they were required to call the customer service personnel to verify the orders as the fax copy of the orders generally tend to be illegible. Intelirel has been able WRVROYHWKHVHSUREOHPVDQGIXO¿OOWKHFXVWRPHU expectation through their e-business strategies. Some medium sized customers wanted to place their orders through EDI, but want to know the status of the orders using the Web site(s). Intelirel also has been developing its e-commerce tools to satisfy customer demands. Order tracking has been one of the new features that have been added. Customers can now track the status of their order as soon as the order is placed. Customer intelligence enables Intelirel to better understand its customers (i.e., lifetime YDOXH GHPRJUDSKLFV SUR¿WDELOLW\ SUHIHUHQFHV tendencies, etc.) so that the company can more effectively acquire, retain, service, and/or crosssell those customers to meet strategic business objectives. For example, by analyzing the pattern of products that Intelirel received in its e-business RUGHUVWKHFRPSDQ\LVPDUNHWLQJDVSHFL¿FVHW of apparels for their customer base in Texas. The company found that the demographics presented better opportunities for a particular line of products. In essence, customer intelligence marries decision support tools with database marketing and customer relationship management (CRM) practices and products. Intelirel sees a huge market opportunity to deliver products being proactive in the competitive market. Also, an important aspect of this e-business strategy is correlating customers’ online behavior with the purchasing activity. If the e-business tools can provide information as to which Web pages or sequence of pages drives purchases and which FDXVH³GHDGHQGV´LWFRXOGHQKDQFHWKH³IRFXVHG´ marketing efforts and increase customer response. E-business should always complement other busi-

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ness channels and not be viewed as a means of cannibalizing them.

,QWHOLUHO¶V%HQH¿WV Intelirel has been able to gain as much from it as other successful e-business adopters in this LQGXVWU\7KHFRPSDQ\¶V³GRLWULJKWRUGRQ¶WGRLW at all” (Rifkin & Kurtzman, 2002, p. 93) approach entailed a number of strategic measures such as regular testing of its Web sites for security, usability, and performance; devising a performance metrics system for its Web site; development of a strategic partnership with major providers of media, technology and services, and digital colors. 7KHEHQH¿WVRIWKHVHPHDVXUHVWR,QWHOLUHOKDYH been both internal and external. $VDQLQGLFDWRURIH[WHUQDOEHQH¿WVWKHFRPpany gained 10 to 15% of market share in 1999 because of its successful full blown assimilation RIHEXVLQHVVWHFKQRORJLHV%HQH¿WVDQG,QFHQWLYHV provided by Intelirel attracted a large number of its customers to transact with the company on the Internet. According to an e-business manager at Intelirel, the increase in market share could be attributed to the increase in visibility of the products for the distributors and retailers as well as other incentives provided by the company. As we noted in the previous section, the company’s e-business implementation can be GHVFULEHG DV ³EXVLQHVV PRYHV´ DQG QRW VLPSO\ ³WHFKQRORJ\SOD\V´5LINLQ .XUW]PDQ p. 96). According to an e-business manager at Intelirel, e-business assimilation of the company HYROYHGIURPD³UHYHUVHLPSDFWFKDLQ´WKDWLVWKH company went to its customers with the e-business ideas and implemented it only after it got a positive response from them. This is unlike strategies in OHVVVXFFHVVIXOFRPSDQLHVWKDWDUHPHUHO\³WHFKnology plays” and customer response is often the last step in the implementation process. Many companies face problems in disposing of their slow moving items or an inevitable product

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cannibalization. In this regard, Intelirel has been DEOHWROHYHUDJHPD[LPXPEHQH¿WE\SXEOLVKLQJ its closeout prices on the e-business domains. This makes the retailers and distributors to bid for the highest price, as the information is available to all the buyers. Before the e-business revolution at Intelirel, closeout prices were only offered to Intelirel’s distributors who then sold them to WKHUHWDLOHUVIRUDSUR¿W7KHSULFHRIIHUHGE\WKH distributors couldn’t be negotiated because of the lack of customer response. ,QWHOLUHOKDVLGHQWL¿HGRYHUWKH\HDUVWKDW:HE has a 70% more reach11 than the usual in-store marketing making this a very vital part of its business. As 90% of the company’s order process is automated, Intelirel is able to leverage internal EHQH¿WV E\ UHGXFLQJ PDQXDO HQWU\ HUURUV DQG allocate its excess human resources in the order processing areas to other operations in the company. The company has already converted 50% of its non-EDI customers to use the e-business medium. The cut in its order processing staff has allowed the company to pass on the savings to its customers in the form of promotions and discounts. This is especially important given the fact that the company’s products are priced higher than most of its competitors (see Table 1).

CURRENT CHALLENGES/ PROBLEMS FACING THE ORGANIZATION /LNHDOO¿UPVLQWKLVEXVLQHVV,QWHOLUHOLVIDFLQJWKH special demands made on information technology by the rapidly globalizing apparel industry. The current e-business model is disintegrated making it inconvenient for customers to make bundled orders. Each division of Intelirel maintains its own e-business site to process the orders and provide support. The customer needs to log into the appropriate division to make purchases rather than order all products under one business. Also,

Intelirel’s Transition to E-Business

the existing e-business model makes it very complicated to organize all their business processes under one banner. Intelirel also suffers from a lack of product awareness among its target segments. Many of its business customers are not aware of the various products offered by Intelirel, which is very crucial to Intelirel’s growth in the long run. Many customers complained to the company that they did not know about a sale on a brand of apparel or did not have any marketing information related to Intelirel’s new lines of products. Being a leader in the middle-income group of the population, the company can focus in attracting the high-end customers. E-business plays a very important role in developing the opportunities DQGUHGH¿QLQJFXVWRPHUH[SHFWDWLRQV7KHPDUket is dominated by upscale brands, thus making it convenient for Intelirel to penetrate into this segment of few players. As the upscale brands enter the low-end segments, Intelirel’s business territories might be encroached. E-business challenges are areas of focus at Intelirel, as the business customers are pushing these manufacturers to provide them with complete order and product information. Intelirel will have a much tougher job on their hands with their e-business portals being decentralized. The growth of technology has also added to Intelirel’s problems. Having already set the stage for being the leader of providing e-solutions to their customers, Intelirel has increased its customer expectations. Maintaining that stronghold ZLOOGH¿QLWHO\EHDWRXJKWDVNWRDFFRPSOLVKDV technology develops by leaps and bounds. Some retailers have begun their transition LQWR WKH UDGLR IUHTXHQF\ LGHQWL¿FDWLRQ 5),'  world. This phenomenon is likely to trigger a drastic change in the way suppliers/manufacturers would interact with their customers. RFID implementation has already started off in a rapid pace at Intelirel complicating things even more as the companies tried to improve its services in all dimensions of its e-business methodologies.

How can the company accomplish the tasks mentioned previously and maintain its position in its market? Would it succumb to the pressures of its customer expectations? Would its competitors take advantage of the fact that Intelirel might WDNHDZKLOHLQ¿[LQJLWVGHFHQWUDOL]DWLRQLVVXHV" These are a few questions that cross one’s mind while analyzing the challenges ahead for the company.

REFERENCES Attaran, M. (2004). Nurturing the supply chain. Industrial Management, 46(5), 16-20. Benjamin, R. & Wigand, R. (1995, Winter). Electronic markets and virtual value chains on the information superhighway. Sloan Management Review, 36(2), 62-72. Bobbin. (2001). E-color offers color consistency solution, 42(6), 10-11. Carr, R. (1999, February 8). Going public has hurt the industry. Sporting Goods Business, 32(3), 15. Carroll, B. (2003). Speakers: B2B link saves time, money. Furniture Today, 27(49), 6. Dan, A., Dias, D. M., Kearney, R., & Lau, T. C. (2001). Business-to-business integration with tpaML and a business-to-business protocol framework. IBM Systems Journal, 40(1), 68-90. DiMartino, C. (2000). E-wiz! Computer color is changing everything! Apparel Industry Magazine, 61(12), 38-41. Electronic Commerce News. (2002). Using XML to move data and dollars together. Electronic Commerce News, l7(8), 1. Emmelhainz, M. A. (1990). Electronic data interchange: A total management guide. New York: Van Nostrand Reinhold.

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Ford, D., Gadde, L. E., Hakansson, H., Lundgren, A., Snehota, I., Turnbull, P. & Wilson, D. (1998). How companies relate to each other. In Managing business relationships (pp. 17-40). Chichester, England: John Wiley & Sons. Foster, T. A. (2000). Collaborative planning, forecasting and replenishment — Made for the Web. Retrieved February 11, 2005, from http://www. supplychainbrain.com/archives/10.31.00.Planning.htm?adcode=10 Franklin, D. (2001, Summer). Beyond the e-business revolution. The OECD Observer, (226/227), 48-49. Ghosh, S. (1998). Making the business sense of the Internet. Harvard Business Review, 76(2), 126-35.

cite fashion and costs for foreign production. Wall Street Journal, 1. Malone, T., Yates, J., & Benjamin, R. (1987). Electronic markets and electronic hierarchies. Communications of the ACM, 30(6), 484-497. McAtee, L. F., Jr. (1999). Customers service skills for survival. Hospital Materiel Management Quarterly, 21(2), 18-25. McIvor, R. P. H. (2004). The implications of electronic B2B intermediaries for the buyer-supplier interface. International Journal of Operations & Production Management, 24(3/4), 241. Merrick, A. (2003, September 26). Sears to sell clothing on its Web site. Wall Street Journal, B2.

Green, M., Garrity, J., Gumbus, A., & Lyons, B. (2002). Pitney Bowes calls for new metrics. Strategic Finance, 83(11), 30-35.

Newbery, M. (2004, November). Trends in online apparel retailing, forecasts to 2010 — ManagePHQWEULH¿QJ+RZIDUFDQRQOLQHJR"Just-Style, 22-24.

Haar, J. & Reyes, S. (2002). Trade liberalization and market competitiveness of the Colombian apparel industry. Multinational Business Review, 10(2), 11-22.

Power, D. J. & Sohal, A. S. (2002). Implementation and usage of electronic commerce in managing the supply chain. Benchmarking, 9(2), 190-208.

Hamel, G. (2001). Is this all you can build with the Net? Think bigger. Fortune, 143(9), 134-137. Hill, S. (1999). E-tailing: The Internet meets SCM. Apparel Industry Magazine, 60(10), 66-68. Kaufman, R. (1997). Nobody wins until the FRQVXPHUVD\V³,¶OOWDNHLW´Apparel Industry Magazine, 58(3), 14-15. Kelly, K. & Andersen, A. (2000). Apparel e-commerce: Online and kicking. Apparel Industry Magazine, 61(3), 48-50. Kuntz, J. (2000, March 27). Age and income play key roles in online sales. Daily News Record, 19. /OR\G0(-XO\ 7H[WLOH¿UPVERRVWLQJ sales from overseas — Bedding and towel makers

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Radosevich, L. (1997). Electronic data interchange: The once and future EDI. CIO Magazine. Retrieved February 11, 2004, from http://www. cio.com/archive/ec_future_edi.html Rifkin, G. & Kurtzman, J. (2002). Is your e-business plan radical enough? MIT Sloan Management Review, 43(3), 91-97. Scannell, T. V., Vickery, S. K., & Droge, C. L. (2000). Upstream supply chain management and competitive performance in the automotive supply industry. Journal of Business Logistics, 21(1), 23-48. 6HGODN36 &RQTXHUWKHHIXO¿OOPHQW challenge. Apparel Industry Magazine, 61(9), 81.

Intelirel’s Transition to E-Business

Smailes, J., Sapienza, C., Bullock, G. R., Kehoe, A. M., & Lewis, M. (1998). Kmart’s new apparel vision. Discount Store News, 37(11), A7. Spralls, S. A., III. (2001). Internet migration: The construct, research propositions, and implications. In American Marketing Association Conference Proceedings, Vol. 12 (pp. 370-371).

2

Swaminathan, J. M. & Tayur, S. R. (2003). Models for supply chains in e-business. Management Science, 49(10), 1387-1406.

3





4

Tedeschi, B. (2004, December 27). Last-minute VKRSSHUVÀRFNHGWRWKH,QWHUQHWOHDGLQJRQOLQH retail sales to surpass estimates for the holiday season. New York Times, C5.

5

Vickery, L. & Agins, T. (2001, June 25). RetailHUV ¿QG :HE DSSDUHO XQSUR¿WDEOH Wall Street Journal, B6. Vigoroso, M. W. (2001). The bottom line in Web design: Know your customer. EcommerceTimes. com. Retrieved November 14, from http://www. macnewsworld.com/story/14738.html

6

Williamson, R. (2004, March 16). Eshakti gets the power online. WWD, 12.

ENDNOTES *



1

This case, prepared by Nir Kshetri and Satya Jayadev of the University of North Carolina at Greensboro, is based on a real company. Company and Web site names as well as some data used in the case have been disguised. The authors wish to thank an IJCEC associate editor and three reviewers for insightful comments on an earlier version of this case. (', LV GH¿QHG DV WKH LQWHURUJDQL]DWLRQDO exchange of business documentation in a form that is structured and can be processed by a machine (Emmelhainz, 1990, p. 4). EDI

7

8

9

10

is used for incoming sales orders, advanced shipment notices (ASN), electronic funds transfer (EFT), transmission of point of sale (POS) data, and so on (Power & Sohal, 2002). 6HH³,QGXVWU\3HUVSHFWLYH(',LQWKH$Sparel Industry” at http://www.ebridgesoft. com/downloads/apparel.pdf (Accessed March 24, 2005). This is based on online retail ranking from business2.0. 7KH ,QWHUQHW¶V JHQHUDO EHQH¿WV KDYH EHHQ examined widely in the literature. We focus RQDSSDUHOVSHFL¿FEHQH¿WVLQWKLVVHFWLRQ For instance, Lands’ End introduced the concept of a virtual model in October 2000. The simulation of a dressing room experiHQFHVLJQL¿FDQWO\LQFUHDVHGWKHFRPSDQ\¶V rates of converting an online visitor into a buyer (see Vigoroso 2001). The non-EDI customers transact through phone or fax. Intelirel’s customer service representatives (CSR) take those orders and process them. Intelirel plans to reduce the number of CSRs and pass on that savings to the customers. The company already has an established e-business portal. Increasing e-business customers will help the company standardize their modes of advertising and marketing since there would be fewer channels to focus their efforts. For instance, according to 1992 census of retail sectors, women’s, juniors’ and misses’ wear ranked Number 6 and men’s wear ranked Number 8. For an illustration of similar uses in another company, see Green, Garrity, Gumbus, and Lyons (2002). ,Q 90, WKH ³UHSOHQLVKPHQW GHFLVLRQ IRU all retailers is centralized at the upstream distributor or manufacturer” (Attaran, 2004, p. 18). See Foster (2000).

1287

Intelirel’s Transition to E-Business

11

The company found that there were 70% more customers visiting their online showroom than the brick and mortar stores.

This work was previously published in the International Journal of Cases on Electronic Commerce, edited by M. Khosrow-Pour, Volume 2, Issue 1, pp. 46-60, copyright 2006 by IGI Publishing (an imprint of IGI Global).

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1289

Chapter 4.19

Laws and Regulations on Proprietary Trading System (PTS) in Japan: Japanese Alternative Trading System (ATS) Motoaki Tazawa Meijo University, Japan

ABSTRACT

INTRODUCTION

In order to improve convenience for investors through competition among stock exchanges, operation of Proprietary Trading Systems (PTS) was authorized as a form of securities business under the Securities and Exchange Act. The Japanese PTS is equivalent to ATS (Alternative Trading System), ECN (Electronic Communications Network) in the United States and MTF (Multilateral Trading Facilities) under MiFID in the EU. In 1998, ATS and ECN had already started in the United States and Japan’s PTS followed the U.S. model. Telecommunication and information technologies and computer technologies made PTS possible, and PTS makes the border between the market and brokers ambiguous. Traditional regulations on broker-dealers and stock exchanges will inevitably be reviewed and regulations on securities markets will have to be reformed.

Under the Financial System Reform of 1998, the no off-exchange trade rule which had been imposed on the sales of securities listed on such stock exchanges as the Tokyo Stock Exchange and the Osaka Securities Exchange was abolished. As a result, it became possible for securities companies which are the members of stock exchanges to trade the listed stocks through off-exchange trades. In connection with this, in order to improve the convenience of investors through competition among stock exchanges, operation of Proprietary Trading System (PTS) was authorized as one of the securities businesses under the Securities and Exchange Act. The Japanese PTS is equal to Alternative Trading System (ATS) and Electronic Communications Network (ECN) of the United States and MTF (Multilateral Trading Facilities)1 of MiFID of the EU (Shimizu, 1997; Shimizu,

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Laws and Regulations on Proprietary Trading System (PTS) in Japan

2000; Osaki, 1999; Konishi, 2000; Yanaga, 20062). In 1998, ATS or ECN had already begun operating in the United States and PTS of Japan followed the U.S. model (Kawashima, 2001)3. In June 2006, the Securities and Exchange Act was revised and in 2007, the Securities and Exchange Act will be revised to the Financial Instruments and Exchange Act and regulatory IUDPHZRUNZLOOEHPRGL¿HGWRWKDWRI¿QDQFLDO service law or investment service law.4 The secuULWLHVEXVLQHVVZLOOEHPRGL¿HGWRWKH³¿QDQFLDO LQVWUXPHQWVEXVLQHVV´DQGWKHVDPHGH¿QLWLRQRI the PTS will be provided in the Financial InstruPHQWVDQG([FKDQJH$FWDVRQHRIWKH¿QDQFLDO instruments businesses (Art. 2(8) (X)). Current regulations on the PTS will generally be succeeded after being transferred to the Financial Instruments and Exchange Act.

BACKGROUND OF INTRODUCING PTS Abolition of No Off-Exchange Trade Rule The Financial System Reform Act (Act No. 107 of 1998) shaped the concepts and recommendations RIWKH¿QDOUHSRUWRIWKH6HFXULWLHVDQG([FKDQJH &RXQFLO³&RPSUHKHQVLYH5HIRUPRI6HFXULWLHV Market—Towards the Realization of a Prosperous and Diverse 21st Century” (June 13, 1997)5, HWFDQGVRIRUWK7KH¿QDOUHSRUWUHFRPPHQGHG abolition of the no off-exchange trade rule and authorization of the off-exchange trading of listed securities from the viewpoint of meeting diversi¿HGQHHGVRILQYHVWRUV Conventionally in Japan, trading of securities listed on stock exchanges was required to be executed on the market for exchange-listed securities established by the stock exchange not only for trades by securities companies, the members of the stock exchange, but also for trades by non-member securities companies.

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That is, securities companies, the members of the stock exchange were prohibited from trading of securities listed on the stock exchange off the market for exchange-listed securities by the articles of association of the stock exchange.6 Non-member securities companies of the stock exchange were supposed to execute trading of listed securities on the market for exchange-listed securities through consignment to member securities companies pursuant to the regulations of EXVLQHVVDQGVHUYLFHVE\WKHPLQLVWHURI¿QDQFH Therefore, with respect to the listed securities of the stock exchange, there was no room for execution of trading off the market for exchange-listed securities (Kanzaki, 2000). Abolition of the no off-exchange trade rule and introduction of the PTS are generally stated as IROORZVLQ³)UDPHZRUNIRU5HOLDEOHDQG(I¿FLHQW Transaction” (May 16, 1997)7, the report of Market Working Party, which was established under the Securities and Exchange Council. 7KHUROHVRIVHFXULWLHVPDUNHWVDUHWR³HI¿FLHQWO\DQGIDLUO\´SHUIRUPPDQDJHPHQWRI¿QDQFLDO assets and distribution of funds to capital needs and securities market reform must ensure that VHFXULWLHVPDUNHWVFDQSOD\VXFKUROHVVXI¿FLHQWO\ and appropriately. In order for asset management DQGIXQGLQJWREHPDGH³HI¿FLHQWO\´LWLVHVVHQWLDO to introduce the principle of competition and it is also necessary to review how the regulated market should be in connection with this. The prime reason for abolition of the no off-exchange trade rule was (1) the promotion of competition among stock exchanges, and secondarily, there were the IROORZLQJUHDVRQV UHVSRQVHWRGLYHUVL¿HGQHHGV of investors, 8 (3) development of information and telecommunications technologies, 9(4) response to globalization of stock exchanges.10 The no off-exchange trade rule has been established to give volume to the regulated market as well as to contribute to fair price discovery. Stock exchanges are granted a special position in securities market, to which the antitrust law was not applied and as a Self Regulatory Organization (SRO)

Laws and Regulations on Proprietary Trading System (PTS) in Japan

under the Securities and Exchange Act, it was authorized to impose certain restrictions on the actions of member securities companies. Among the regulations of stock exchanges, however, it has been pointed out that the no off-exchange trade rule under the articles of association restricted competition. In terms of promoting competition among stock exchanges, it was considered to be necessary to drastically review the regulations restricting execution of customer’s order by securities companies, including their abolition (Osaki, 2000; Fuchita, 199911).

Trade as Off-Exchange and in Regulated Market In the report of the Market Working Party, if an off-exchange trade was authorized to securities companies by abolishing the no off-exchange trade rule, it was an issue whether (a) a National Market System was to be formulated or (b) the system in which stock exchanges still occupied the main market status was to be formulated. a.

The National Market System is based on the following concept. If it authorizes securities companies to execute not only in a regulated market but also off-exchange, as the method for enabling to work competitive principles in execution of purchase and sale orders, secure fair price discovery and obtain the best execution of the customer’s orders, it is necessary to enable securities companies to execute purchase and sale orders based on such a quote information system as following: the quote information system which covers all quote information not only in stock exchanges but also off-exchange and publishes it in real time.

It apparently seems that fragmentation of the market arises under this scheme, however, as any quote information is intensively published and securities companies can execute purchase and

sale orders based on it, it is functionally conceivable that price discovery is made as trades in one comprehensive market. However, it requires an enormous cost and considerable time for preparation to arrange such infrastructures. There is also concern that dispersion of supply and demand to off-exchange trading will reduce the liquidity of exchanges, major markets, and fair price discovery would also be hindered. Therefore, while it is one of the options to have a market with such a system as to how the Japanese securities market should be in the future, judging from the current conditions of Japan, it was considered that it would EHPRUHHI¿FLHQWDQGSUHIHUDEOHWRIRUPXODWHD framework which would make the most of the price discovery function of stock exchanges and the adoption of this National Market System was thus passed over. b.

The system in which stock exchanges still occupy a main market status takes a position that the price discovery function by auction method in the market for exchange-listed securities as a main market is maintained and that trading off the market for exchangelisted securities shall be conducted using the above function. Under this system, execution of purchase and sale orders from customers on listed securities will be made on the market instructed by the customers, they shall be executed on the market for exchange-listed securities if the instructions of customers DUHQRWVSHFL¿FDOO\JLYHQWRRIIWKHPDUNHW for exchange-listed securities. Trading off the market for exchange-listed securities shall be executed within a certain scope of the price based on the price discovered on the market for exchange-listed securities. In order for customers to make a reasonable choice and give instructions on whether to execute their orders on the market for exchange-listed securities or off the market for exchange-listed securities, it is important

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Laws and Regulations on Proprietary Trading System (PTS) in Japan

for them to precisely know the outline of the trading off the market for exchange-listed securities and the price information of listed securities. Therefore, after abolition of the no off-exchange trade rule, as a part of trade regulations, securities companies shall explain to customers the outline of trading off the market for exchange-listed securities and provide customers with the price information of the listed securities. The report of the Market Working Party supported such a concept (b) mentioned. Therefore, when the Financial System Reform Act of 1999 introduced the PTS, the priority rule of markets for exchange-listed securities in execution of customer’s orders by securities companies was simultaneously embodied in the Securities and Exchange Act as following. Except cases that FXVWRPHUVVSHFL¿FDOO\LQVWUXFWHGWKHLURUGHUVWREH executed off the market for exchange-listed securities, execution of purchase and sale orders from customers on listed securities shall be executed on the market for exchange-listed securities.12 And arrangements for price discovery and execution of the PTS were limited to price-importing reference market method and negotiation method in 1998. In 2000, limit order matching method and market maker method were added. As a result, this legal framework provided for protection of market for exchange-listed securities and did not promote competition among stock exchanges including PTS. This situation was inconsistent with the REMHFWLYHRIWKH¿QDQFLDOV\VWHPUHIRUP.LQ\X Ho Iinkai, 200213). Considering, the Securities and Exchange Act was revised in 2005 (Yukizawa, 2005; Nakanishi & Ogura, 2005)14. The priority rule of markets for exchange-listed securities was abolished15 and duty of best execution, which means securities companies are obliged to execute orders on terms most favorable to customers, was introduced. Auction method was added to arrangements for price discovery and execution of the PTS, how-

1292

ever, volume regulations were imposed on auction method. The PTS still does not enjoy an equal status of stock exchanges in securities trading. Details of these will be discussed later.

PTS According to the report of the Market Working Party, it has been pointed out that if the no offexchange trade rule is abolished, as establishment of a Proprietary Trading System (PTS) is expected, it is also necessary to take legal measures for ensuring fairness of trading for a new form of trading. In such an event, if the new trade system has a similar high price discovery function as stock exchanges, such a system must naturally be regulated as the stock exchange. As it is expected that under such a system for the time being, however, the price discovery function of a stock exchange will be utilized and a similar high level of the price discovery function will not work, it is appropriate to position it as a securities business not a stock exchange; provided, however, that minimum rules must be imposed in terms of prevention of unfair trading depending on the nature of the forum of trading in addition to regulations on securities companies. The concepts reported by Market Working Party are now considered not to be consistent with the policy to promote competition among stock exchanges. This is the prime reason for abolition of the no off-exchange trade rule. This recognition explains the addition of auction method to one of the arrangements for price discovery and execution of the PTS in 2005, which details are in the following.

PTS AS THE SYSTEM UNDER THE SECURITIES AND EXCHANGE ACT By the Financial System Reform Act (Act No. 107 of 1998) in 1998, the Securities and Exchange

Laws and Regulations on Proprietary Trading System (PTS) in Japan

Act (Act No. 25 of 1948) was revised and the PTS was added to securities businesses (Art. 2(8) (vii)). Thereafter, as stated, with respect to the arrangements for price discovery and execution, DGGLWLRQZDVPDGHWZRWLPHV7KH¿UVWDGGLWLRQ was made by revision and implementation of the Ordinance of the General Administrative Agency of the Cabinet in 2000. 16 The second addition was made by the Revising Act (Act No. 97 of 2004) of the Securities and Exchange Act, which came into force in April 2005.17 As in effect in 2006, the following provisions are enacted for the PTS in the laws and regulations.

from the Prime Minister for performance of PTS (SEA, Art. 29(1) (iii)). Criteria for regulatory authorization are as follows (SEA, Art. 28-4): 1.

2.

'H¿QLWLRQRI376 3. Art. 2(8) of the Securities and Exchange Act KHUHLQDIWHUUHIHUUHGWRDV³6($´ SURYLGHVIRU WKHGH¿QLWLRQRIZKDWNLQGRIEXVLQHVVVHFXULWLHV business performs and provides for the contents of business which securities companies may perform (Nikko Shoken Homubu, 199918). PTS LVGH¿QHGLQ6($$UW YLL DVRQHRIWKH VHFXULWLHVEXVLQHVVHV7KDWLV376LVGH¿QHGDV ³SXUFKDVHDQGVDOHRIVHFXULWLHVRULWVLQWHUPHGLDtion, brokerage, or agency which is carried out by the method for determining the execution price of an order set forth below or similar methods, simultaneously setting multiple parties as either party or both parties through the use of electronic information processing system.”

Criteria for Regulatory Authorization of PTS Securities companies are business corporations which are registered as securities business with the Prime Minister (SEA, Art. 2(9) and Art. 28). In order for securities companies to perform PTS, however, registration for the securities business is LQVXI¿FLHQWEHFDXVHSHUIRUPDQFHRI376E\VHcurities companies requires expertise in business and a high level of risk management and securities companies must receive regulatory authorization

4. 5.

It has arranged appropriate systems and rules concerning risk management of losses related to businesses for which it intends to receive regulatory authorization. Minimum capital requirement for securities companies which perform ordinary purchase and sale, and so forth, of securities is JPY50 million, but the minimum capital requirement for securities companies which perform PTS is JPY300 million. Amount of net assets is over the amount set forth in item 2, JPY300 million. Capital adequacy regulation ratio is over 120%. The method for determining the execution price of an order, the method of delivery and other settlement, standards for start of trade with customers and method of customer management, method of operation of electronic information processing system, method of preparation, and retention of trade records are necessary and appropriate for public interest and investor protection.

Difference between Regulated Securities Market and PTS— Degree of Price Discovery Function It is provided that on the stock exchange to establish a securities market, the permission of the Prime Minister is required (SEA, Art. 80(1)). In a securities company starting PTS, the regulatory authorization of the Prime Minister is required (SEA, Art. 29(1)(iii)). For the market for Over-TheCounter traded Securities (OTC market), as it is provided that the Securities Dealers Association itself, which establishes the market, requires the regulatory authorization of the Prime Minister (SEA, Art. 80 (1) and Art. 68 (2)).

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Laws and Regulations on Proprietary Trading System (PTS) in Japan

In the background of the above provisions, there seems to be a difference between the subject of establishing a market and PTS, which have similar functions to the market. Securities businesses (securities companies) which establish the PTS are under the registration system and the Securities Dealers Association is under the regulatory authorization system and stock exchanges are under the permission system and the contents of regulations therefore are naturally different. While stock exchanges and the Securities Dealers Association have broad authority in selfUHJXODWLRQLWLVDVLJQL¿FDQWLVVXHWKDWVHFXULWLHV companies which establish PTS do not originally have a self-regulatory function such as ensuring fair trade against market participants. A securities market may not be established by other than those who obtained permission from the Prime Minister, except for the Securities Dealers Association. On the other hand, in the event that securities companies, and so forth, perform purchase and sale and its intermediation, brokerage, or agency of securities, permission is not required (SEA, Art. 80). That is, in the event that securities companies, and so forth, perform purchase and sale of securities, it does not fall under establishment of the securities market, which requires permission. The concept suggested by the Securities and Exchange Act is that it exempts the securities business from application of a permission system, while it brings into its view that a securities business might be inherently a market. Such a method of provision is perceived that conducting the securities business collectively on the Internet and VSHFLDORQOLQHWHUPLQDOVXVLQJDVSHFL¿FPHWKRG for determining the execution price of an order, is not regarded as securities business under the registration system, but it is the purpose of the Act to make them subject to more sophisticated regulations under the permission system. That is, there was such line drawn as those with a more sophisticated price discovery function

1294

require permission and if it is not so sophisticated, LWLVVXI¿FLHQWWRUHFHLYHUHJLVWUDWLRQDVDVHFXULWLHV business or regulatory authorization of PTS. It may be understood, in essence that the presence of a sophisticated price discovery function is added as an element for determining whether it is a securities market or not in SEA. This explains the reason why auction method applied to PTS is subject to volume regulations and conditions for regulatory authorization of PTS prescribe quantitative criteria concerning trade volume, which details are discussed later.

ARRANGEMENTS FOR PRICE DISCOVERY AND EXECUTION As of 2006, arrangements for price discovery and H[HFXWLRQLQ376KDYHWKHIROORZLQJ¿YHPHWKRGV In 1998, when the provisions of PTS were newly enacted in SEA, only the price-importing reference market method and negotiated method were the methods to determine the execution price of an order of PTS. Supply and demand in securiWLHV WUDGLQJ DUH QRW UHÀHFWHG LQ SULFHV RI WKHVH methods, which did not have a price discovery function. Thereafter, as already explained, in order to promote competition among stock exchanges including the PTS, limit order matching method and market maker method were added in 2000, and auction method was added in 2005.

Price-Importing Reference Market Method19 It is a crossing system, and does not discover prices itself but import prices from the stock exchange market/OTC market where the securities to be traded are listed. For example, a transaction is concluded based on the closing price or VWAPVolume Weighted Average Price of the stock exchange market/OTC market where the securities to be traded are listed.

Laws and Regulations on Proprietary Trading System (PTS) in Japan

Negotiation Method20 It is a kind of order-driven method. Bid and ask quotes are collected and displayed to PTS participants. They respond, enter into negotiations, and conclude a trade under the agreed terms within the system. Orders are not matched automatically. PTS provides facilities and opportunities to negotiate and execute. This method would be appropriate for large block trades.

ties, as it is no different from the price discovery function through market making in the regulated OTC market, it is required to be subjected to legal regulations of the regulated OTC market and it may not be performed as a securities business. Only the Securities Dealers Association, which was incorporated by regulatory authorization from the Prime Minister, may establish the market for OTC traded securities. This is currently the Japan Securities Dealers Association (JSDA).24

Limit Order Matching Method21

Auction Method25

If a limit order price to sell and a limit order price to buy are matched, those orders are executed based on that limit order price. It is an order-driven method, however, it is different from an auction method applicable to stock exchange trades because a market order and Itayose method22 are not allowed and orders are executed just through matching limit orders placed by PTS participants. A PTS that executes orders by this method is considered not to have a price discovery function VXI¿FLHQWO\ FRPSDUDEOH WR WKDW RI D PDUNHW IRU exchange-listed securities.

By the revision of the Securities and Exchange Act26, from April 1, 2005, the auction method was introduced as a method for determining the execution price of an order and it has been in effect up to the present. In terms of formulating DQ HI¿FLHQW DQG FRPSHWLWLYH PDUNHW DV D SDUW of improvement in the institutional framework of competition among stock exchanges, equal footing on competing conditions between stock exchanges and PTS was intended to be secured and the same method for determining prices by the auction method as stock exchanges was introduced to PTS. Since PTS may perform purchase and sale of securities by the Auction method similar to that of stock exchanges, purchase and sale by the Itayose method27 or market order became possible. Under this scheme, there is no longer a difference in the method of purchase and sale between PTS and stock exchanges, the only difference is the trade volume and the degree of the price discovery function. On other methods to determine the execution price of an order, volume regulation is not imposed under the Securities and Exchange Act, but in the case of the auction method, it is provided, ³LWLVOLPLWHGWRWKHYROXPHRISXUFKDVHDQGVDOH of securities which does not exceed the criteria determined by the Cabinet Order.” (SEA, Art.  YLL D 7KLV&DELQHW2UGHULV³&ULWHULDLQ the case of the Auction Method” provided by Art.

Market Maker Method23 In a quote-driven, market maker system, transactions are concluded between investors and market makers. The latter continuously quotes binding bid and ask prices for certain securities, however, a market maker of the PTS is not obliged to do so, thus, he does not guarantee that securities can be traded immediately at any time. This is a material difference between a market maker of a PTS and that of the market for the Over-The-Counter traded securities. Therefore, a PTS using this method is considered not to have as much a sophisticated price discovery function as the market for OTC traded securities. If a PTS operator is obliged continuously to quote binding bid and ask prices for certain securi-

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Laws and Regulations on Proprietary Trading System (PTS) in Japan

1-9-2 of the Cabinet Order for Enforcement of the Securities and Exchange Act (Cabinet Order No. 321 of 1965) and it has the following content (Nakanishi & Ogura, 200528). The average amount of the gross trade amount per business day concerning purchase and sale of exchange-listed securities and OTC traded securities performed by the Auction method in the past 6 months is 1% of the average amount of the gross trade amount per business day concerning purchase and sale of exchange-listed securities and OTC traded securities performed by the market for exchange-listed securities and the market for OTC traded securities in the past 6 months. The average amount of gross trade amount per business day concerning each item of exchangelisted securities and OTC traded securities performed by the Auction method in the past 6 months is 10% of the average amount of the gross trade amount per business day concerning purchase and sale of exchange-listed securities and OTC traded securities performed by the market for exchange-listed securities and the market for OTC traded securities in the past 6 months. Due to the described quantity regulation, it is perceived that PTS using the auction method does not have such a sophisticated price discovery function as the market for exchange-listed securities. However, in the event that the criteria are exceeded, acquisition of permission for establishment of the market for exchange-listed securities as the stock exchange shall be required. In this regard, it is to be noted that when the securities company receives regulatory authorization for PTS business from the Prime Minister VWDWHG³TXDQWLWDWLYHFULWHULDFRQFHUQLQJWKHWUDGH volume” 29 which are attached to the conditions for regulatory authorization are different from the described criteria.

1296

GUIDELINES FOR ESTABLISHMENT OF PTS With respect to a new form of securities business, PTS, it was expected that there might be various problems that were not anticipated in the traditional securities business in terms of securing fair trade and investor protection. Accordingly, the Financial Services Agency has recognized the need for promoting environmental improvements contributing to the digitalization of securities exchanges based on the viewpoint of investor protection and the Financial 6HUYLFHV$JHQF\SXEOLVKHGWKH³*XLGHOLQHVIRU Establishment of Proprietary Trading Systems” on November 16, 2000. Regulatory authorization of the PTS business, based on revised ordinances under these guidelines and administrative guidelines, was enforced as of December 1, 2000 at the same time as the enforcement of the revised Securities and Exchange Act. These Guidelines consist of the following content (Osaki, 2001; Yoshino, 200130).

Enhancement of Arrangements for Price Discovery and Execution in PTS Business In addition to the conventional price-importing reference market method and negotiated method, WKHGHVFULEHG³OLPLWRUGHUPDWFKLQJPHWKRG´DQG ³PDUNHWPDNHUPHWKRG´ZHUHQHZO\DXWKRUL]HG 6SHFL¿FDOO\WKH2UGLQDQFHRIWKH*HQHUDO$Gministrative Agency of the Cabinet concerning GH¿QLWLRQVSUHVFULEHGE\$UWLFOHRIWKH6HFXrities and Exchange Act31 was revised and the SURYLVLRQVRI$UWWLWOHG³$UUDQJHPHQWVIRU price discovery and execution of PTS operation business” was enacted. As a result of the addition of two types of price discovery methods, limit order matching method and market maker method, PTS acquired a certain price discovery function. Accordingly, the quantitative criteria

Laws and Regulations on Proprietary Trading System (PTS) in Japan

described were established so that it would not have such sophisticated price discovery function as the market for exchange-listed securities and the market for OTC traded securities. Since Art. RIWKHUHYLVHG6($GH¿QHVE\GLYLGLQJLQWR those who require permission for establishment and those who may establish with regulatory authorization without permission, at the enforcement of the revised SEA as of December 1, 2000, the Financial Services Agency performed the work to determine among the contents of established markets the scope where it is performed as PTS, one of the securities businesses, and the scope where it may be performed only with the permission for securities exchange and it was summarized as the quantitative criteria based on the trading volume.

Improvement in Rules for Securing Fair Trade: Conditions for PTS Regulatory Authorization Since securities companies have no self-regulatory function, if a certain price discovery function arises due to addition of the method for determining execution price of an order, there may be the possibility of problems on securing fair trades and investor protection. Therefore, in terms of preventing unfair trade, it is necessary to impose rules depending on the nature of the forum where such trades are conducted, including the nature of handling securities. The quantitative criteria based on trading volume share and the external announcements of price information were introduced as conditions for regulatory authorization of the PTS. These rules were provided in the administrative guidelines of the Financial Services Agency32 in the beginning of December 2000, but the guidelines were abolished as of July 15, 2005 and the same contents were provided in WKH³&RPSUHKHQVLYH6XUYHLOODQFH*XLGHOLQHVIRU Securities Companies” of the Financial Services Agency, published on the same date.

External Announcement of Price Information, and so forth In securing fair trade in off exchange trades, including the PTS business, it is necessary for the price discovery to be made fairly and transparently. For that purpose, factors such as reporting, concentration, and announcement of price information are essential. Therefore, in the PTS EXVLQHVVKDQGOLQJVKDUHFHUWL¿FDWHVSXEOLFDWLRQ is required by the method externally accessible in real time in the form which is able to compare the best quote and trading prices with those of the PTS operated by other securities companies and it is a condition for regulatory authorization of the PTS business that it has the mentioned form.33 It seems to be a provision, considering the U.S. National Market System (NMS), but integration of quote information of the same item is not required unlike the U.S. Consolidated Quotation System (CQS). ,WLVVXI¿FLHQWWKDWTXRWHLQIRUPDWLRQRIWKH376 RSHUDWLRQFRPSDQLHVLV³FRPSDUDEOH´ Such conditions for regulatory authorization are limited to those handling so-called equity securities, including stocks and warrant bonds (securities provided for in Art. 59-2 of the Cabinet 2I¿FH2UGLQDQFHFRQFHUQLQJ6HFXULWLHV&RPSDnies). These conditions are not imposed on debt securities, including corporate bonds. This takes into consideration the characteristics of bond trading, where there are a great variety of debt securities, including corporate bonds and besides it LVWHFKQLFDOO\GLI¿FXOWWRSXEOLVKLQGLYLGXDOTXRWH and trading information, it is relatively easy to evaluate the validity of price from interest rates and credit ratings. As the system enabling the publication, the PTS Information Network34 operated by the Japan Securities Dealers Association (JSDA) started operation on April 30, 2002.35 JSDA decided to formulate the system satisfying the conditions, as response to request of the Financial Services Agency and in light of its position of managing

1297

Laws and Regulations on Proprietary Trading System (PTS) in Japan

c.

and regulating the purchases and sales through off-exchange trades of securities listed on stock exchanges.

Introduction of Quantitative Criteria based on Trading Volume Shares Since securities companies do not have a self-regulatory function, in the event that trade participants increase and the size (trade volume share) expands beyond a certain level as a result of introducing a certain price discovery function to the PTS, the problems may arise in terms of securing fair trades as well as the liquidity of stock exchanges, and so forth, a major market. These may result in disturbance of fair price discovery. Therefore, for the PTS business which covers stocks and warrant bonds (only those listed on stock exchanges or registered with an OTC market), if trade volume shares exceed a certain level, a certain measures shall be required based on this, which are the conditions for regulatory authorization.36 6SHFL¿FDOO\WKH\DUHDVIROORZV 

1298

,Q WKH SDVW  PRQWKV LI WKH UDWLR RI ³WKH daily average trading value at PTS” of stocks and warrant bonds which are listed on the market for exchange-listed securities or the PDUNHWIRU27&WUDGHGVHFXULWLHVWRWKH³WRWDO trading value on the stock exchange market or OTC market” is over 10% as to any of an item and over 5% of the total securities handled by PTS, the following measures shall be taken. a. In order to secure fairness in trades, the system (organization and personnel) which is in charge of trade management and examination shall be enhanced and improved. b. In order to secure the certainty of performance of settlement, a system similar to a reserve for compensation for default loss of stock exchanges shall be prepared.

2

In order to secure safety and certainty of the system capacity, and so forth, VXI¿FLHQW FKHFNV VKDOO EH UHJXODUO\ conducted. In the past 6 months, in the event that the ratio has exceeded 20% as to any of an item and 10% of the total securities handled by the PTS, permission for establishment of securities market shall be obtained.

The Financial Services Agency is supposed to FRQ¿UPWKHUDWLRVHWIRUWKLQLWHPDQGPRQWKO\ The reason for bonds not being the subject of these quantitative criteria is as follows: that is, from the reality of bond trading that such bonds as government bonds and corporate bonds are traded almost all through OTC trading even if they are listed securities, it is not appropriate to determine the level of regulation based on the trading volume at stock exchanges. In addition, with respect to both the PTS which cover stocks or warrant bonds listed in the stock exchange market or the OTC market and other PTS, if it is necessary for public interest and investor protection corresponding to the expansion of trading volume, new criteria may be established to that extent.

Review of Regulatory Authorization Criteria and Periodic Reporting It is expected that new forms of the securities business will be developed, which was not expected in the traditional securities business, along with the expansion of the scope of the PTS business. Therefore, in terms of investor protection, and so forth, as the response of examination and supervision of regulatory authorization of a new form of the PTS business, necessary reviews were made for the criteria of regulatory authorization described and periodic reporting, and so forth. 6SHFL¿FDOO\LWZDVSURYLGHGLQWKH$GPLQLVWUDWLYH Guidelines37 and Article 10 of Ordinance of the

Laws and Regulations on Proprietary Trading System (PTS) in Japan

General Administrative Agency of the Cabinet concerning Securities Companies38. First, it was noted that attention should be given to the following points in determining whether it falls under the PTS or not. a.

The system in which brokerage of the purchase and sale of securities on the market for exchange-listed securities or the market for OTC traded securities is conducted or brokerage of the purchase and sale of securities to another single securities company is conducted, is considered as not falling under the Proprietary Trading System and the market for exchange-listed securities.

This means the transmission system of order information such as online trading services on the Internet provided to individual investors by each securities company, which does not accompany the execution of orders, does not fall under the 376³6\VWHPZKLFKFRQGXFWVEURNHUDJHRIWKH purchase and sale to another single securities company” is considered to mean the mechanism, in which non-member securities companies of the stock exchange conduct brokerage to the member securities companies and to the market makers RII D VWRFN H[FKDQJH ³6\VWHP ZKLFK FRQGXFWV brokerage to other multiple securities companies” may cause the possibility of falling under PTS by market maker method. b.

In the cross system in which the purchase and sale of securities is conducted between customers, with respect to the system which concludes the purchase and sale based on the posted quotation that summarized the demand and supply of securities by various orders, the Proprietary Trading System may fall under the market for exchange-listed securities.

It is the provision anticipating rather special circumstances where the securities company

performs market making alone. It means securities companies which perform market making are considered to change quotations, taking into consideration the status of orders from customers and its own position. It shows recognition that if quotation is presented in conformity to WKHRUGHUHGSULFHRIFXVWRPHUVDIWHUFRQ¿UPLQJ the equilibrium of supply and demand, collecting orders for the purchase and sale from customers in advance (so-called leave order), it is actually the same as matching the orders of customers. And if there is such a reality, it falls under the PTS. Since this provision exists, it is clear that ordinary sole market making requires regulatory authorization for the PTS business. Next, it was pointed out to pay attention to the following points in regulatory authorization for the business. 1.

Enhancement of the Internal Management System a. In principle, a person in charge of the PTS business has over 5 years of experience in the securities business and the department performing the PTS business are assigned organization and personnel required for performance of the business. b. Method of identifying the person is established in the PTS business. c. Method and system of excluding the purchase and sale which hinders fair trades, including insider trading in PTS business have been established. d. Internal rules, which are in accordance with the laws and regulations including the Securities and Exchange Act, are prepared in relation to PTS business.

2.

Obligation of Full Explanation to Customers of Trading Rules, including the method for determining execution price of an order. In explanation of the business to customers,

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Laws and Regulations on Proprietary Trading System (PTS) in Japan

3.



1300

the system, which can make prior full explanation about the following matters, are prepared. a. Purchase and sale price discovery method b. Trading rules from order to execution and settlement c. Handling of default d. Execution possibility at the quoted price Securing Safety and Certainty of System Capacity, and so forth. The following matters are prepared with respect to securing the safety and certainty of system capacity related to the business. a. Forecast of the number of future orders and execution, and so forth, shall be reasonably made and the system capacity corresponding thereto shall be secured. b. Based on the forecast, testing shall be VXI¿FLHQWO\FRQGXFWHG c. Monitoring method and the system, which enables prevention and early discovery of excess of system capacity and failures, and so forth, are prepared. d. Method and the system of countermeasures (explanation to customers and communication method, etc.) in the case of system failure are established. e. System is duplicated (back-ups exist). f. Assessment of a third party (external organization) was made and the safety and certainty of the system was con¿UPHGZLWKUHVSHFWWRWKHGHVFULEHG matters.In fact, examination of regulatory authorization considerably puts focus on the safety of the system. 3UHYHQWLYH 0HDVXUHV IRU &RQ¿GHQWLDOLW\ of Trading Information39 With respect to FRQ¿GHQWLDOLW\ RI WUDGLQJ LQIRUPDWLRQ RI

FXVWRPHUVUHODWHGWRWKHEXVLQHVVVXI¿FLHQW measures are taken, including the following matters. a. Personnel who are engaged in the business shall be clearly separated between the business department and other departments. b. It is prohibited that the personnel engaged in the business perform the business using the information related to other business or that the personnel engaged in other business perform other business, using the information related to the business. c. Measures for not divulging the trading information of customers to the outside are precisely taken. d. Internal rules are prepared for the described measures. These are the measures for preventing acts with FRQÀLFWRILQWHUHVWVLQFOXGLQJLQWHQWLRQDOFURVVLQJ when securities companies perform simultaneously the purchase and sale as brokerage and trading with having positions as dealers. For example, if the order placed with PTS has arrived via the dealing department of the securities company, by looking at the order of the customer, it is possible for the securities company to intentionally match the position of the securities company or the orders RIRWKHUFXVWRPHUVZKLOHWKHFRPSDQ\¿QGVRXW the price on the stock exchange is favorable to the customer. The system intends as practicable as possible to exclude the room for occurrence of acts hindering fairness of trades by establishing appropriate walls in the securities company for the trading information of customers related to the PTS business.

Response in Surveillance After the regulatory authorization for the PTS business, the following points were supposed to be noted in response to surveillance.

Laws and Regulations on Proprietary Trading System (PTS) in Japan

D

E

c.

&RQ¿UPDWLRQRIWKHWUDGLQJYROXPHVKDOOEH made by report, and so forth, as to whether the conditions for regulatory authorization DUHVDWLV¿HG &RQ¿UPDWLRQRIWKHSHUIRUPDQFHFRQGLWLRQ of the measures examined in regulatory authorization shall be made by requiring a report as appropriate. In the event that the methods of business, including delivery and other settlement method, are intended to be changed after the regulatory authorization, request shall be made for prompt application for regulatory authorization pursuant to the laws.

PRESENT SITUATION AND PROSPECTS OF PTS On June 30, 2000, the bond trading market sysWHPRIH%RQG6HFXULWLHV,QFREWDLQHGWKH¿UVW regulatory authorization for a PTS in Japan. Since RQO\¿QDQFLDOLQVWLWXWLRQVSDUWLFLSDWHGLQWKLV PTS, it was unsuccessful as a securities business, which was liquidated in April 2001. As of October 31, 2006, there are 273 domestic securities companies and 35 foreign securities companies in Japan, a total of 308 securities companies, out of which only 12 securities companies obtained regulatory authorization for a PTS business. Nine companies40 obtained regulatory authorization for a PTS as a bond trading system out of the 12 companies. Three companies, Monex, Inc., Kabu.com Securities Co., Ltd. and Instinet Japan Limited, which operate respective PTS for securities trading, obtained regulatory authorization for a PTS for the trading system of equity securities. PTS of Instinet has institutional investors, securities companies, and business companies as its customers and trading is performed during the daytime from 8:00 to 17:00. Negotiation method, market maker method, and price-importing reference market method are adopted as arrangements

for price discovery and execution. It seems to mainly deal with large block trades and basket trades by PTS. In contrast, Monex and Kabu.com cover individual investors and provide after-hours trading. Monex adopts the price-importing reference market method. Kabu.com obtained the regulatory authorization for a PTS business on July 11, 2006 and started a PTS business on September 15. Kabu.com has gained attention as the only PTS adopting the auction method at present. The trading value of Kabu.com in the after-hours market was only JPY90,050,000 a day on average for the 19 business days between September 15 and October 13. The total trading value of PTS was only 0.1% of the total trading of all securities and only JPY50 billion to JPY60 billion a month. At this point, it cannot be said that it is active as participants and items of securities for PTS trading are limited (Ozaki, 200641). The biggest reasons for the sluggish trading are as follows: (1) Participants in the market are limited to individual investors. Participation of institutional investors whose order volume is large per order has not been authorized as a result of prior consultations with the Financial Services Agency until steady operation of the system can EHFRQ¿UPHG$VWKHWUDGLQJYROXPHLVVPDOOWKH SULFHVLJQL¿FDQWO\ÀXFWXDWHVZKHQDODUJHRUGHU is placed for a particular security, which makes it GLI¿FXOWIRULQGLYLGXDOLQYHVWRUVWRXVH 0DUJLQ trading has not been introduced and adoption of cash trading is another reason. It is for avoiding confusion among investors, but as margin trading cannot be used, which consists of 60-70% of the Internet traded securities by individual investors, it has been regarded as being inconvenient for use on the market. As breakthrough measures, introduction of margin trading, extension of trading hours and increase in the number of items of securities traded and part of them have been realized. Fortunately, system failure, which was a concern initially, did not occur since trading volume was small. There-

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Laws and Regulations on Proprietary Trading System (PTS) in Japan

fore, the Financial Services Agency is said to be considering a policy of permitting participation of institutional investors, whose order volume is large, in a PTS in the future. As was stated, PTS is in low gear in Japan, but in the Unites States, ATS and ECN, the equivalents to PTS of Japan have been very successful. 7KHUHDVRQIRUWKHVXFFHVVZDVLQHI¿FLHQWPDUNHW structure of the United States. The NYSE still has DSK\VLFDOWUDGLQJÀRRU42 and NASDAQ employs a market maker system. Both have inherent inef¿FLHQFLHVDQGLQYHVWRUVLQFXUXQUHDVRQDEO\KLJK WUDGLQJFRVWV'XHWRWKHVWUXFWXUDOLQHI¿FLHQFLHV $76DQG(&1ZKLFKSURYLGHPRUHHI¿FLHQWVHUvices have been successful in the United States. However, major markets of the world other than the United States have adopted central limit order system (best execution by auction) QRWDPDUNHWPDNHUV\VWHPDQGKDYHVXI¿FLHQWO\ computerized access without a physical trading ÀRRU7KHUHIRUHWKH\DUHUHJDUGHGDVDGHTXDWHO\ HI¿FLHQWPDUNHWVZKLFKLVFRQVLGHUHGWREHWKH reason for such a system as ATS or ECN not being required in other parts of the world. That is, ATS and ECN are merely systems in a transitional VWDJHWRWUDQVIHUPRUHHI¿FLHQWPDUNHWV0L\RVKL 200043). Therefore, under the present condition in which other markets of the world are transferring WRPRUHHI¿FLHQWSUR¿WHDUQLQJVWUXFWXUHV$76 DQG(&1FDQQRWEHWKHVLJQL¿FDQWHOHPHQWVLQ the markets (Mühlberger, 200544). Today, as telecommunications and information technologies have highly developed, we have an environment in which orders from domestic customers can be easily executed abroad and it is expected with stock exchange markets in each country, PTS and ATS will compete over whether they can provide services which attract orders from customers beyond borders not only within the country (Osaki, 200545). In fact, such competition among markets in the EU is beginning. A group of seven global investment banks have agreed to establish a pan-European equities trading platform known as Multilateral Trad-

1302

ing Facilities (MTF) that will compete with the region’s domestic stock exchanges following the introduction of the EU’s Markets in Financial Instruments Directive (MiFID) in November 2007. The seven investment banks include Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, and UBS. This project is responding to the MiFID legislation by creating an integrated pan-European trading platform where equities can be traded more cost HIIHFWLYHO\ REWDLQLQJ VLJQL¿FDQW OLTXLGLW\ ZLWK JUHDWHUHI¿FLHQF\IRUHDFKDQGHYHU\SDUWLFLSDQW in the equity markets. In Japan, in which direction will PTS develop? 8QOLNH WKH LQHI¿FLHQW PDUNHW VWUXFWXUHV RI WKH United States, trading is concentrated in one market, where over 90% of the trading volume of all stock exchanges is executed on the Tokyo Stock ([FKDQJH,WLVDOVRDQHI¿FLHQWPDUNHWDGRSWLQJWKH full auction method under an automatic matching system by computer. If PTS intends to compete over execution of an order at the best price, there LVOLWWOHURRPOHIWRYHU7KHUHIRUH376FDQ¿QG LWVVLJQL¿FDQFHQRWLQWKH³DOWHUQDWLYH´PDUNHWRI WKHH[FKDQJHPDUNHWEXWLQWKH³VXSSOHPHQWDU\´ PDUNHW WR UHVSRQG WR WKH GLYHUVL¿HG QHHGV RI investors, including after-hours trading. Lastly, the remaining problems of PTS in Japan will be stated. Under the present Japanese legal system, a framework of regulation has been adopted, which distinguishes securities markets and PTS by the particular method for determining price, positioning the particular method for determining price as inherently having a sophisticated price discovery function, but it is doubtful. The level of strictness of regulations on a trading system must be determined, focusing attention on such factors as trading volume, number of participants, and composition. If PTS will develop in the future, an integrated quotation information publication system such as NMS or CQS shall be necessary as an infraVWUXFWXUHQRWWKHSUHVHQW³SXEOLFDWLRQRITXRWD-

Laws and Regulations on Proprietary Trading System (PTS) in Japan

tion information in comparable form” in order to prevent a schism in the market. It is believed that a low liquidity situation where the trading volume of PTS is small will continue in the near future. As liquidity is low, VWRFNSULFHVWHQGWRÀXFWXDWHVLJQL¿FDQWO\HYHQ in a not so large trade by speculation and rumor, it is necessary to prepare a system of monitoring unfair trades, including market manipulation. The provisions of the Securities and Exchange Act, which regulate market manipulation, have the part which provides for subjecting exchange trade (e.g., SEA Art. 159(2)(ii) & Art. 160, etc.), which has a statutory drawback that it is not applicable to PTS. If such price sensitive information as a merger is announced at night, there are such problems DVZKHWKHUDWUDGLQJKDOWFDQEHÀH[LEO\PDGHRU PRQLWRULQJRILQVLGHUWUDGLQJFDQEHVXI¿FLHQWO\ made. Telecommunications and information technologies and computer technologies realized PTS, and PTS is making the borders between markets and brokers ambiguous. Traditional regulations on broker-dealers and stock exchanges will be inevitably reviewed and the regulations on securities markets will be unable to avoid reform (Osaki & Kozuka, 200146).

FURTHER RESEARCH DIRECTION Japanese securities law tried to distinguish regulated securities markets and PTS by keeping auction method exclusive to regulated markets. The rationale was that a sophisticated price discovery function should be given only to a regulated securities market. PTS was introduced to Japan with the purpose of promoting competition among securities markets. From this viewpoint, there LVOLWWOHMXVWL¿FDWLRQIRUNHHSLQJDXFWLRQPHWKRG exclusive to regulated markets. This is the reason of revision made to the Securities and Exchange Act in 2004 that introduced auction method to

PTS. However, trading volume regulation was simultaneously introduced, and distinction between regulated securities markets and PTS are prescribed not by method for determining price but by trade volume under auction method. It is wrong to formulate legal framework with implicit premise that PTS is inherently differs from regulated markets. Development of information technology makes it possible for securities companies to perform function of stock exchange and boundary between a stock exchanges and a securities company becomes ambiguous. Now it PD\EHVDLGWKDWERWKDUH³PDUNHWV´7KHGLIIHUHQFH between them is whether it has self regulatory function which secures fair trade on the market to protect investors. In the U.S., new SEC rule, 5HJXODWLRQ  $76 EURDGHQV WKH GH¿QLWLRQ RI stock exchange so as to include ATS, and ATS may be registered as not a stock exchange but a broker-dealer with subject to certain conditions such as becoming a member of a self regulatory organization, and so forth. In the U.S. system, ATS is a market without self-regulatory function, and may be registered as a broker-dealer. The U.S. regulation seems a SUDFWLFDODSSURDFKDWWKHVDFUL¿FHRIWKHRUHWLFDO consistency. There arises an issue concerning how to regulate a whole market structure comprising different types of markets. On the other hand, a stock exchange is also changing its character. Traditionally it is a QRQ±SUR¿W PHPEHUVKLS RUJDQL]DWLRQ FRQVLVWing of market participants with self regulatory function. However, recently demutualization of a stock exchange is a world-wide trend. It means that a stock exchange becomes a non-membership RUJDQL]DWLRQIRUSUR¿WDEXVLQHVVFRUSRUDWLRQ$ stock exchange is a business corporation, and can a business corporation properly perform a self regulatory function? In Japan, the same question was discussed before introducing PTS as a securities business. Now both a stock exchange and a securities FRPSDQ\DUHEXVLQHVVFRUSRUDWLRQVIRUSUR¿WDQG

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Laws and Regulations on Proprietary Trading System (PTS) in Japan

both operate a securities market. The boundary between them becomes more ambiguous. The issue is how to implement and secure self regulatory function or its substitute measures in order to protect investors. Although a stock exchange still maintains its character as a self regulatory organization, its function may be considered weakened by demutualization. Taking into account of investor protection and competition among securities markets, the combination puzzle of a market, a stock exchange, a securities company, and a self regulatory function increases its complexity. Designing a whole market structure with consistency is not easy.

REFERENCES

KINYU HO IINKAI (Financial Law Committee). (2002). Interim organizing of issues concerning WKHFRQFHSWRI³6HFXULWLHV0DUNHW´Jurist, 1225, 38-50. Konishi, N. (2000). Regulations on electronic securities market: Focusing on ATS (Alternative Trading System) Regulation. Sandai Hogaku, 33(3&4), 326-360. Miyoshi, H. (2000). Shoken shijo denshika no subete (All about computerization of securities market). Tokyo: Tokyo Shoseki Kabushikigaisha. Mühlberger, M. (2005). Alternative trading systems: a catalyst of change in securities trading. Deutsche Bank Research, 47, 1-12.

Bessembinder, H., & Venkataraman, K. (2003). Does an electronic stock exchange need an upstairs market?Journal of Financial Economics, 73(1), 3-36.

Nakanishi, K., & Ogura, T. (2005). Outline of development of cabinet orders, etc., with respect to introduction of obligation of best execution under the Securities and Exchange Act. Shoji Homu, 1726, 31-37.

Fuchita, Y. (1999). Regulations on stock exchanges and regulations on proprietary trading system. Jurist, 1155, 185-191.

Nikko Shoken Homubu (Ed.). (1999). Provision RI GH¿QLWLRQV FRQFHUQLQJ VHFXULWLHV HWF Shoji Homu, 1528, 28-35.

JSDA (Japan Securities Dealers Association). (2002). Development on JSDA regulations related to announcement system of quotation, etc. of proprietary trading system. Shoken Gyoho, 615, 6-13.

Osaki, S. (1999). Electronic Communications Network (ECN). Shihon Shijo Quarterly, 3(2), 49-61.

Kanzaki, K. (2000). Abolition of no off–exchange trade rule. In Shouken Torihiki Hou Kenkyu Kai (Securities Law Study Group) (Ed.), Kin’yu shisutemmu kaikaku to shoken torihiki seido (pp. 145-160). (Financial System Reform and Securities Trading System). Tokyo: Nihon Shouken Keizai Kenkyujyo.. Kawashima, I. (2001). Electronic securities trading system and securities law (Issues on Civil & Commercial Law No. 10). Senshu Daigaku Hogaku Kenkyujo Kiyou, 26, 31-73.

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Osaki, S. (2000). Kabushiki shijo kan kyosoNASDAQ no sekai senryaku to nihon (Competition among stock exchanges: Global strategy of NASDAQ and Japan). Tokyo: Diamond Corp. Osaki, S. (2001). New PTS (Proprietary Trading System) Regulation on Japan. Shihon Shijo Quartlerly, 4(3), 66-75. Osaki, S. (2005). Progress in borderless transactions on securities exchanges and market regulations. In K. Egashira & Y. Masui (Eds.), Tokeru sakai koeru ho 3 shijo to soshiki (Market and Organization)0HOWLQJERUGHUDQGÀRZLQJRXWRI

Laws and Regulations on Proprietary Trading System (PTS) in Japan

laws No.3). (pp. 85-203). Tokyo: Tokyo Daigaku ShuppanKai. Osaki, S. (2006). PTS for night trading of stocks LQ-DSDQ6LJQL¿FDQFHDQGLVVXHVNomura Capital Market Review, 9(4), 16-24. Osaki, S., & Kozuka, S. (2001). Electronic securities trading and issues on legal system. Jurist, 1195, 98-103. Shimizu, Y. (1997). Proprietary trading system (PTS) in US and competition among markets. Shoken Keizai Kenkyu, 7, 121-140. Shimizu Y. (2000). Alternative trading system (ATS) in US and SEC regulations. Shoken Keizai Gakkai Nenpou, 35, 83-88. Yanaga, M. (2006). PTS regulations in European countries. Shoji Homu, 1781, 4-19. Yoshino, I. (2001). Current situation and issues concerning establishment of proprietary trading system (PTS) in Japan. Gekkan Shihon Shijo, 188, 57-70. Yukizawa, K. (2004). Obligation of best execution in the Securities and Exchange Act. Shoji Homu, 1709, 4-23.

ADDITIONAL READINGS Amaro, R. J. (2002). European Union Regulation RIHOHFWURQLFFRPPXQLFDWLRQQHWZRUNV6WLÀLQJ global integration of securities markets. Wisconsin International Law Journal, 20, 397-414. Avgouleas, E. (2005). A critical evaluation of WKHQHZ(&¿QDQFLDOPDUNHWUHJXODWLRQ3HDNV troughs, and the road ahead. The Transnational Lawyer 8QLYHUVLW\ RI WKH 3DFL¿F 0F*HRUJH School of Law), 18, 179-229. Badway, E. E., & Busch, J. M. (2005). Ending securities industry self-regulation as we know it. Rutgers Law Review, 57, 1351-1376.

Beny, L. N. (2002). U.S. secondary stock markets: A survey of current regulatory and structural issues and a reform proposal to enhance competition. Columbia Business Law Review, 2002, 399-473. Borrelli, M. (2001). Market making in the electronic age. Loyola University Chicago Law Journal, 32, 815-908. Bronfman, C., Lehn, K., & Schwartz, R. A. (1994). SYMPOSIUM: MARKET 2000: The SEC’s Market 2000 Report. The Journal of Corporation Law (University of Iowa), 19, 523-551. Chtaneva, A. (2002). Alternative trading systems: Impact of technology on securities market structure. Banking & Finance Law Review, 17(3), 342-378. Cohen, P. D. (1999). Securities trading via the Internet. Stanford Journal of Law, Business & Finance, 4, 1-38. Collins, A. L. (2002). Regulation of alternative trading systems: Evolving regulatory models and prospects for increased regulatory coordination and convergence. Law and Policy in International Business, 33, 481-506. Dombalagian, O. H. (2005). Demythologizing the stock exchange: Reconciling self-regulation and the national market system. University of Richmond Law Review, 39, 1069-1154. Fleckner, A. M. (2006). Stock exchanges at the crossroads. Fordham Law Review, 74, 25412620. Frase, D., & Parry, H. (2001). Exchanges and alternative trading systems. Sweet & Maxwell. Gallagher, D. M. (1998). Move over tickertape, here comes the cyber-exchange: The rise of integrated-based securities trading systems. Catholic University Law Review, 47, 1009-1056. Karmel, R. S. (2002). Turning seats into shares: Causes and implications of demutualization of

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stock and future exchanges. Hastings Law Journal, 53, 367-430. Klock, M. (1999). The SEC’s new regulation ATS: placing the myth of market fragmentation ahead of economic theory and evidence. University of Florida Law Review, 51, 753-797.

securities trading systems. Columbia Business Law Review, 1999, 165-205.

ENDNOTES 1

Macey, J. R., & O’Hara, M. (1999). Regulating exchanges and alternative trading systems: A law and economics perspective. The Journal of Legal Studies, 28, 17-54. Macy, J. R., & O’Hara, M. (2005). From markets to venues: Securities regulation in an evolving world. Stanford Law Review, 58, 563-599. Matus, G. (2001). The regulation of alternative trading systems: Market fragmentation and the new market structure. New York Law School Law Review, 44, 583-604. 0D\QDUG7+ :KDWLVDQ³H[FKDQJH"´ Proprietary electronic securities trading systems DQGWKHVWDWXWRU\GH¿QLWLRQRIDQH[FKDQJHWashington and Lee Law Review, 49(3), 833-912. McCarroll, E. (2000). Regulation of electronic communications networks: An examination of Tradepoint Financial Network’s SEC approval WR EHFRPH WKH ¿UVW QRQ$PHULFDQ H[FKDQJH WR operate in the United States. Cornell International Law Journal, 33, 211-262.

2

3

4

5

6

Nyquist, P. (1995). Failure to engage: The regulation of proprietary trading systems. Yale Law & Policy Review, 13, 281-337. Poser, N. S. (2001). The stock exchanges of the United States and Europe: Automation, globalization, and consolidation. University of Pennsylvania Journal of International Economic Law, 22, 497-540. Rubin L. (1998). What is an exchange? Oxford University Press. Thompson, A. R. (1999). Taming the frontier?: An evolution of the SEC’s regulation of internet

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7 8

‘Multilateral trading facility (MTF)’ means a multilateral system, operated by an investPHQW¿UPRUDPDUNHWRSHUDWRUZKLFKEULQJV together multiple third-party buying and VHOOLQJLQWHUHVWVLQ¿QDQFLDOLQVWUXPHQWV²LQ the system and in accordance with non-discretionary rules—in a way that results in a contract in accordance with the provisions of Title II of MiFID. See, SHIMIZU (1997) pp.121-140, SHIMIZU (2000) pp.83-88, OSAKI (1999) pp.49-61, KONISHI (2000) pp. 326-360, YANAGA (2006) pp.4-19. For detailed comparison and analysis, KAWASHIMA (2001) pp. 31-73. Brief descriptions of this revision are explained in: http://www.fsa.go.jp/en/policy/ ¿HOSGI http://www.fsa.go.jp/p_mof/singikai/shoken/top.htm This site page is Japanese text only. No off-exchange trade rule is provided as a rule under the Securities and Exchange Act but was implemented through (a) the provisions of articles of association of stock exchanges and (b) provisions of the regulations by the Ministry of Finance concerning business method of securities companies. These provisions of the articles of association and the regulations on business method were abolished in December 1998. See, supra note (5). For example, large block trades and basket WUDGHVRILQVWLWXWLRQDOLQYHVWRUVKDYHGLI¿FXOW\LQHI¿FLHQWO\H[HFXWLQJWUDGHVGHSHQGLQJ on the auction method under conventional principles of price priority and time priority.

Laws and Regulations on Proprietary Trading System (PTS) in Japan



9

10

11

12 13

14

15

16 17 18

19

The auction method requires much time for execution of large block orders and basket orders and has a problem that bulk execution of orders is impossible. Economic analysis on this matter shows the same result. See, Bessembinder & Venkataraman (2003) p. 27. $V D UHVXOW RI VLJQL¿FDQW GHYHORSPHQW RI telecommunications and information technologies, as it became necessary to prepare such market infrastructure for a new trading system as ATS in the United States, it is necessary to take measures for the no offexchange trade rule not being an obstacle to market infrastructure improvements. As globalization of securities trading has continued to develop, trades that prove dif¿FXOWWRH[HFXWHLQ-DSDQZLOOHDVLO\ÀRZRXW abroad to seek an opportunity to execute abroad. In order to maintain the vitality of the securities market in Japan, it is necessary for the Japanese securities market to be attractive and convenient for investors. No off-exchange trade rule imposes restrictions on trades executed by market intermediaries (securities companies) and it should be UHYLHZHGIRUSUHYHQWLRQRIRXWÀRZRIWUDGLQJ overseas. See, Osaki (2000) pp. 173-198, Fuchita (1999) pp. 185-191. SEA Art. 37. See, KINYU HO IINKAI (2002) pp. 3850. See, Yukizawa (2005) pp. 14-23, Nakanishi, & Ogura (2005) pp. 31-37. SEA Art. 37 was deleted by Act No. 97 of 2004 concerning Amendment of the Securities and Exchange Act, which came into force in April 2005. See, infra note (21) and note (23). SEA Art. 2(8)(vii)(a). See, Nikko Shoken Homubu (1999) pp. 3334. SEA Art.2(8)(vii)(b)&(c).

20



21

22



23

24

25 26

27 28 29



30

31



SEA Art.2(8)(vii)(d). 6($$UW YLL H &DELQHW2I¿FH2UGLQDQFHFRQFHUQLQJ'H¿QLWLRQVSUHVFULEHGE\ Article 2 of Securities and Exchange Act (Ordinance of Ministry of Finance No.14 of 1993) Art.8-2 (i). The order book prior to the start of the session is often complicated with offers (sell) at lower prices than bids (buy) and bids at higher prices than offers, as well as a mixture of market offers and bids. Under the Itayose method all orders reaching the order book are treated as simultaneous orders, in other words there is no time priority. Bids and offers are matched at a single price according to the principle of price priority. 6($$UW YLL H &DELQHW2I¿FH2UGLQDQFHFRQFHUQLQJGH¿QLWLRQVSUHVFULEHGE\ Article 2 of Securities and Exchange Act (Ordinance of Ministry of Finance No.14 of 1993) Art.8-2 (ii). JSDA had operated the market for the OverThe-Counter traded securities known as JASDAQ since 1998. In 2004, JASDAQ market became a market for exchange-listed securities instead of a market for Over-TheCounter traded securities; Jasdaq Securities Exchange was created and all securities listed on the JASDAQ became the securities listed on Jasdaq Securities Exchange. At present JSDA does not operate an OTC market. SEA Art.2(8)(vii)(a). Act concerning Amendment of the Securities and Exchange Act (Act No. 98 of 2004). See, supra note 24. See, Nakanishi, supra note (14) pp. 36-37. 6HHWKH)LQDQFLDO6HUYLFHV$JHQF\³*XLGHlines for Comprehensive Supervising for Securities Companies” III—2—2—1 (3)3. See, Osaki (2001) pp. 66-75, Yoshino (2001) pp. 57-70. 1RZLWLVUHQDPHGDVWKH&DELQHW2I¿FH2UGLQDQFHFRQFHUQLQJ'H¿QLWLRQVSUHVFULEHG

1307

Laws and Regulations on Proprietary Trading System (PTS) in Japan

32





33

34



35

36

37





38

by Article 2 of the Securities and Exchange Act (Ordinance of Ministry of Finance No.14 of 1993). )LQDQFLDO 6HUYLFHV $JHQF\ ³$GPLQLVWUDtive Guidelines: On the matters to be noted in supervising securities companies, investment trust companies and investment corporations and securities investment advisers, and so forth. (Part I) Supervision of Securities Companies.” As stated in the text, these Administrative Guidelines were entirely abolished as of July 15, 2005 when ³*XLGHOLQHVIRU&RPSUHKHQVLYH6XSHUYLVLRQ for Securities Companies” was developed. 6HHWKH)LQDQFLDO6HUYLFHV$JHQF\³*XLGHlines for Comprehensive Supervision for Securities Companies” III—2—2—1 (3)a. http://www.pts-info.jp/ 'HWDLOHGUXOHVFDQEHIRXQGLQ-6'$³5HJXlations concerning Off-Exchange Purchase and Sale, and so forth, of Exchange-Traded Securities, including Listed Stocks” (Fair Business Practice Regulations, No. 5) (established on November 18, 1998), Art. 7-Art. 10, -6'$³'HWDLOHG5XOHVUHODWLQJWRWKH5HJXlations concerning Off-exchange Purchase and Sale, and so forth, of Exchange-Traded Securities, including Listed Stocks.” (established on November 18, 1998), and JSDA ³2Q +DQGOLQJ RI 5HSRUW DQG 3XEOLFDWLRQ through Proprietary Trading System Price Information Publication System” (Resolution of the Board of Directors as of April 23, 2002). See, JSDA (2002) pp.6-13. 6HHWKH)LQDQFLDO6HUYLFHV$JHQF\³*XLGHlines for Comprehensive Supervision for Securities Companies” III—2—2—1 (3)3b. 7KLVLVWKHFXUUHQW³*XLGHOLQHVIRU&RPSUHhensive Supervision for Securities Companies” III—2—2—1 (3)3. General Administrative Agency of the Cabinet and Ministry of Finance Ordinance No. 32 of 1998. As the General Administrative

39

40

41 42



43 44 45 46

Agency of the Cabinet was reorganized to &DELQHW2I¿FHLQ-DQXDU\WKHQDPH RIWKHRUGLQDQFHLVFXUUHQWO\WKH³&DELQHW 2I¿FH 2UGLQDQFH FRQFHUQLQJ 6HFXULWLHV Companies.” These are the measures for preventing acts ZLWKFRQÀLFWRILQWHUHVWVLQFOXGLQJLQWHQtional crossing when securities companies perform simultaneously purchase and sale as brokerage and trading having positions as dealers. For example, if the order placed with PTS has arrived via the dealing department of the securities company, by looking at the order of the customer, it is possible for the securities company to intentionally match the position of the securities company or the orders of other customers, while the FRPSDQ\ ¿QGV RXW WKH SULFH RI WKH VWRFN exchange is favorable to the customer. The system intends as practicable as possible to exclude the room for occurrence of acts disturbing fairness of trade by establishing appropriate wall in the securities company for the trading information of customers related to PTS business. These nine securities companies are Japan Bond Trading Co., Ltd., ICAP Totan Securities Co., Ltd., Central Tanshi Securities Co., Ltd., Bloomberg Tradebook Japan Ltd., Yensai.com Co., Ltd., JBond Securities Co., Ltd., Japan Securities Agents, Ltd., BGC Shoken Kaisha Limited, and TradeWeb Europe Limited. See, Osaki (2006) pp. 16-24. 6WRFNWUDGLQJÀRRUVLQ-DSDQZHUHDEROLVKHG in December 1997 at Osaka Securities Exchange and in April 1999 at Tokyo Stock Exchange. See, Miyoshi (2000) pp. 135-138. See, Mühlberger (2005) pp. 8-9. See, Osaki (2005) pp. 185-203. See, Osaki & Kozuka (2001) pp. 98-103.

This work was previously published in Cyberlaw for Global E-business: Finance, Payments, and Dispute Resolution, edited by T. Kubota, pp. 67-87, copyright 2008 by Information Science Reference (an imprint of IGI Global). 1308

1309

Chapter 4.20

Sensis.Com.Au: An Uprising Star of E-Innovation and E-Entrepreneurship Fang Zhao RMIT University, Australia

ABSTRACT

INTRODUCTION

Sensis Search, a young entrepreneurial dot-com ODXQFKHGLQLVWKH¿UVWPRYHULQUHGH¿Qing the Australian search market and creates a new paradigm for Internet searches that delivers relevant, quality local, and global results. This chapter focuses on exploring the experiences of Sensis Search and identifying key issues of its operation. Data for this qualitative case study was collected mainly from two primary sources: (i) a documentary research into Sensis’ business reports, online newsletters, memos, agendas, and RWKHU RI¿FLDO SXEOLFDWLRQV DQG LL  DQ LQGHSWK interview with a senior manager of sensis.com. au. The case study illustrates how Sensis has been managed, how it has succeeded, and what lessons can be learned from its experience.

In 2002, Sensis Pty Ltd was launched as a new corporate brand and company name to replace WKH 3DFL¿F $FFHVV 3W\ /WG D ZKROO\RZQHG subsidiary of Telstra Corporation, Australia’s largest telecommunication company. According to the CEO of Sensis, the name of the company 6HQVLV UHÀHFWV WKH HVVHQFH RI WRGD\¶V EXVLQHVV — keeping people in touch through appealing to the key human senses of sight, sound, and touch, using different media — print, voice, online, and wireless (Sensis, 2002). To strengthen the strategic position of Sensis in online advertising business, the company acquired CitySearch Online and BMC Media Ad Sales, adding new lines of advertising business to Sensis. After two years’ operation driven by an aggressive growth strategy, Sensis has developed into one of Australia’s leading advertising and search companies, offering a suite of print, online, voice, and wireless

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Sensis.Com.Au

products designed to bring buyers and sellers together any time, anywhere. Sensis Pty Ltd has a team of over 3,100 employees, among whom 2,300 are directly employed by Sensis and 800 by its wholly-owned subsidiary the Trading Post Group of companies. Sensis’ products and solutions include: •

•

• •

•

•

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•

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1310

Sensis Search (www.sensis.com.au) — an Internet search engine that utilises some of the most comprehensive and up-to-date product and service listings in Australia, with a much greater emphasis on local and national businesses. The Web site was launched in July 2004 and used by 59% of Australians with more than 5 million visitors every month, according to a recent Neilsen/NetRatings (Sensis, 2004a). Yellow Pages® — with more than 14 million copies in circulation, the Yellow Pages® print directories are found in virtually every home and business in Australia. White Pages® — print and online business directories. City Search® — Australia’s leading online culture and lifestyle guide, offers tailored Internet solutions. Whereis® — Whereis® products and services are the location (digital mapping) and navigation brand of Sensis Search. Sensis1234 — With sensis®1234, callers FDQ¿QGDEXVLQHVVDQGUHVLGHQWLDOOLVWLQJV  through a single number, whether they know the business name or not. MediaSmart® — Provides consulting services on the best sites and advertising formats to reach your target market. Trading Post® — a print and online private DQGFODVVL¿HGDGYHUWLVHPHQWVGLUHFWRU\IRU goods and services. JustListed.com.au — a new commercial and residential online real estate portal currently based in Sydney, where its inventory includes over 42,000 rental and sale properties and

1,670 real estate agents. Due to the very successful performance of the portal, Sensis plans to develop it into a national, online real estate portal. As shown, Sensis Search (sensis.com.au) is a key component of Sensis multiple dimensions of business and plays a central hub role in the interfaces between online and print searches of information. This chapter focuses on exploring the experiences of sensis.com.au and identifying key issues of its operation. Data for this qualitative case study was collected mainly from two primary sources: (i) a documentary research into Sensis’ business reports, online newsletters, memos, DJHQGDVDQGRWKHURI¿FLDOSXEOLFDWLRQVDQGLL DQ in-depth interview with a senior manager of sensis. com.au. The case study focuses on how Sensis has been managed, how it has succeeded, and what lessons can be learned from its experience.

SENSIS SEARCH: CREATING A NEW PARADIGM FOR INTERNET SEARCH IN AUSTRALIA Sensis Pty Ltd launched its search engine Sensis Search (sensis.com.au) in July 2004, which constitutes all the online/electronic portfolio of Sensis Pty Ltd including www.whitepages.com. au, www.yellowpages.com.au, www.whereis.com, and www.CitySearch.com.au (Sensis, 2004c). By doing so, Sensis Search is able to provide Australians with fully blended search results across local proprietary and global Internet content. For H[DPSOH$XVWUDOLDQVFDQXVHVHQVLVFRPDXWR¿QG DORFDOÀRULVWDQ\ZKHUHLQ$XVWUDOLDDQGDOVRWR locate and purchase a pair of shoes in New York. The search engine provides local, commercial, and global searches from which customers can get blended results from local Yellow Pages®, White Pages®, CitySearch®, and Whereis® data, combined with global Web content. Sensis Search is WKH¿UVWPRYHULQUHGH¿QLQJWKH$XVWUDOLDQVHDUFK

Sensis.Com.Au

market and creates a new paradigm for Internet searching that delivers relevant, quality local and JOREDOUHVXOWV6HQVLV6HDUFKUHSUHVHQWVD³ZRUOG ¿UVW´¶DPRQJVHDUFKHQJLQHVDVLWLQWHJUDWHV,Qternet Web page content and structured content HJWKH