Communications of the ACM
Home/Magazine Archive/May 2005 (Vol. 48, No. 5)/Business Types, E-Strategies, and Performance/Full Text
Communications of the ACM
Business Types, E-Strategies, and Performance
Of the multitude of dot-coms in existence in the 1990s, only a fraction survived the crash of the e-commerce (EC) market in the summer of 2000. These companies must now rediscover the principles that governed businesses prior to the EC era. Dot-coms must be rebuilt and transformed to face the new economy: not only must they devise innovative e-strategies [1], but they must also restructure around new business models. After such reengineering efforts, some dot-coms have steadily recuperated from the debacle, but many more are still struggling.
Little research has compared the performance of companies with different business types, including B2B, B2C, and non-EC, and explored their endeavors to continue after the EC crash. In this article we report the results of our investigation of EC companies in the aftermath of the crash, with particular emphasis on their performance as compared to their counterpart non-EC companies, and in light of their EC operations experience. We also identify e-strategies introduced by different companies and evaluated their effectiveness by correlating them with company performance, and examine whether this strategy-performance relationship is contingent upon business type.
Our study adopted a three-stage data collection method. The first stage involved an analysis of the annual reports of 103 companies listed in the Growth Enterprise Market (GEM), which was established by the Stock Exchange of Hong Kong in November 1999. In addition, 16 EC companies with similar histories, reputations, and backgrounds were included. Although GEM imposes no restrictions on the nature of an applicant's business, many of its listed companies come from IT or EC-related fields. Classification of EC and non-EC companies was based on the Dow Jones Internet Index, which classifies firms as EC companies if they derive more than 50% of revenue from EC activities. The latest reports of these 119 companies were thoroughly analyzed to derive financial indices of performance.
In the second phase, we interviewed executives from 15 EC companies to solicit their operations experiences. These interviews resulted in a list of e-strategies used by EC companies to deal with EC turmoil.
In the last phase, we sent this compilation of e-strategies to executives from all 119 companies for them to rate. Seventy-two questionnaires were returned, representing a response rate of 60.5%. These ratings were used to determine the importance of e-strategies. In addition to rating the e-strategies, respondents were also asked to evaluate the extent to which these e-strategies had been implemented within their companies. Their responses were then correlated with the EC company performance data we collected in the first phase to determine the effectiveness of the e-strategies on EC performance. Subsequently, this same data set was used to investigate the relationship between e-strategies and performance, contingent upon different business types.
As the research was based on data collected from Hong Kong, readers should use caution when generalizing our findings to other countries. Most of the responding companies were incorporated under the laws of the Cayman Islands, Bermuda, and Hong Kong. Their company histories were generally less than 10 years, with a majority focused on the e-commerce, IT infrastructure, Internet software, manufacturing, and pharmaceutical arenas.
Of the 119 companies we studied, only 86 had financial indices available. Of these 86 companies, 41 (47.7%) were EC companies and the remaining 45 (52.3%) were non-EC companies. Thirty-one (75.6%) of the surveyed EC companies had B2B operations, and of these, 18 (58.1%) were engaged in e-frastructure business, typically in Internet software and infrastructure support. The remaining 13 (41.9%) were e-market companies, mostly selling Internet content and providing portal support. Only 10 companies (24.4%) had B2C business. They offered services such as games, online stock quotations, groceries, music, and on-demand electronic products.
Findings
Company performance. The Web site online financial reports of all GEM companies in 2001 were evaluated for three performance indicators: profit margin, return on assets, and return on equity [3]. As indicated in Table 1, non-EC companies, on average, outperformed EC companies by a large margin. Unsurprisingly, EC companies recorded a 269.7% drop in their profit margins, a 39.5% drop in return on assets, and a 23.9% drop in return on equity. Of the two types of B2B businesses, e-frastructure companies performed better than e-marketing companies. Although non-EC companies also suffered from the Asian economic crisis, the damage was significantly less than for EC companies.
New e-strategies. The interviews with selected EC companies provided new insights for understanding the e-strategies they had implemented for survival. On the completion of these interviews, we identified 35 e-strategies. These e-strategies were then evaluated for importance and the extent of implementation on a Likert scale of 1 to 7. Of all 35 e-strategies, 17 received a mean of 3.5 or above in these ratings. Therefore, only these 17 e-strategies were used in performance and further analyses.
To evaluate how all these different e-strategies related to each other, a factor analysis was performed to reduce their dimensions for understanding and interpretation. The results, as depicted in the first column of Table 2, suggest that all e-strategies could be factored into four strategies: savings-related, structure-related, policy-related, and marketing-related.
Savings-related strategies focused on budget control to conserve resources for possible future use. Structure-related strategies stressed the formation of a stable, efficient, and effective business and transaction platform for business operations. Policy-related strategies placed great emphasis on the implementation of effective policies to strengthen organizational competitiveness, including internal reengineering activities and external alliance activities. Marketing-related strategies dealt mainly with the improvement of marketing services and the exploration of new and effective marketing channels for better company performance.
Perceived importance of e-strategies. Of all the newly rated e-strategies, the most important was a policy-related strategy adopted by both EC and non-EC companies to streamline and rebuild a robust Internet business model (mean = 6.7). This finding is not surprising, as many EC companies had been criticized for having business plans that were too aggressive, with too much emphasis on market capitalization. The higher survival rate of B2B companies, as compared to B2C companies, has provided solid evidence for the significance of a good business model. In the heyday of EC, most B2C companies were new and lacked profit foundations. Also, customers were unfamiliar with these models and hence had unclear expectation levels.
A comparison of EC and non-EC responses to the importance of their respective e-strategies reveals some interesting findings. Based on the statistical t-test results in Table 2, there was little difference between the importance rankings of e-strategies by EC and non-EC companies, except for three: mobile commerce evolution, e-innovation fostering, and e-generation focus.
The reason EC and non-EC companies perceived the importance of mobile commerce differently was quite obvious. EC companies had a high regard for mobile commerce and believed they needed to redesign their business strategies to make effective use of wireless technology. To EC companies, extending their businesses from PC Internet platforms to a wireless platform is both a natural and immediate strategic move. For non-EC companies, the transition from a bricks-and-mortar platform to an Internet platform has been complicated enough, and further expansion to an unproven wireless platform is not an immediate priority.
EC companies also perceived e-innovation fostering to be significantly more important than did non-EC companies. They believed it was important to empower EC employees with Internet skills to enable their companies' e-strategies and to shift their companies' incumbent culture toward the online world. They also believed their staff's e-innovativeness was a valuable asset for EC companies to compete in the new economy. For non-EC companies, EC activity only represented an extension of their bricks-and-mortar business, serving as an additional market channel to access customers. Consequently, non-EC companies perceived e-awareness or e-innovativeness as less important.
Although the strategy to rebuild a robust Internet business model has not been as widely implemented as had been anticipated, it has had a significant influence on company performance.
A similar rationale can be used to explain why EC and non-EC companies have different perceptions of the strategy to focus the market on today's teensthe e-generation. The marketplace for EC companies only exists in the cyber world, whereas non-EC companies can capitalize on both the cyber world and the traditional business world. Today, teens are turning both the Internet and their mobile phones into spaces where they can be heard [2]. EC companies wish to capitalize on this e-generation by providing its members with a platform for expression, communication, and spending. Non-EC companies, in contrast, are still heavily reliant on traditional markets and have not been compelled to focus on the e-generation market for continued success.
Impact of new e-strategies on performance. The EC companies were also asked to evaluate the extent to which they had implemented new e-strategies. Based on the findings depicted in Table 3a, most EC companies had extensively implemented (mean > 5.5) e-strategies such as spending control, trusted infrastructure establishment, and B2B evolution. Interestingly, the strategy to rebuild a robust business model, which was perceived as the most important e-strategy, was only moderately implemented (mean = 5.2). Most EC companies we studied were listed companies, and their business models may have been difficult to alter without public and official approval.
To determine the effectiveness of all e-strategies, data on the extent of their implementation was regressed with EC company performance data for a correlation analysis. Only six e-strategiesspending control, trusted infrastructure establishment, B2B evolution, business model selection, growth control, and strategic allianceswere significant.
Unsurprisingly, of the six performance-contributing e-strategies, all savings-related e-strategies were critical. During the EC heyday, most EC companies were condemned for being too hasty and for expanding too rapidly, which resulted in capacity and resources being stretched to the limit. Such uncontrolled and unplanned expansion sped up burn rates, which eventually put many EC companies out of business. Hence, the control of such spending and growth will improve EC performance.
The strategy to establish a trusted infrastructure for e-transactions was also a significant performance determinant. This finding reinforces the belief that a secured platform is vital for EC success [4]. Because crisis-like privacy infringements, system insecurity, fraudulent merchant behavior, credit card faults, and product risks have repeatedly been associated with EC activities, EC shoppers have not, in general, trusted online shopping. Hence, it is important to build online trust to positively influence online shoppers' attitudes toward EC activities, which will subsequently motivate them to perform more e-transactions.
Although the strategy to rebuild a robust Internet business model has not been as widely implemented as had been anticipated, it has had a significant influence on company performance. For companies that have replaced their speculative business models with models that are clearly expressed in terms of direction and revenue, their financial performances have subsequently improved. A typical example of a rebuilt business model is the evolution to a more reliable B2B domain. Although not many B2C companies were involved in our study, most have altered their business models to be more B2B oriented.
The observed significance of alliance services and partnership on company performance also has interesting and important implications for EC management practice. Although most EC companies provide customers with many sophisticated services, customers see the importance of providing multiple alliance services to make EC useful. Although partnership and alliance strategies may have implications for trade-offs between company philosophy and strategic orientation, our findings suggest they offer feasible alternatives for improving company performance. Thus, they can still be considered as boom strategies in a bust market, especially when partnering with a third party can provide an important psychological boost for external validation.
Business type and the e-strategy-performance relationship. We performed moderated regression analysis to evaluate the moderating effect of business type on strategy-performance relationship, (see the figure here). The results suggest that business type has a significant moderating effect on e-strategy for company performance, which means there must be a fit between business type and e-strategy type for a company to optimize its performance. To explore how various business types and e-strategies matched up to determine performance, we performed Pearson correlation analysis. As depicted in Table 3b, e-strategies affected EC companies more significantly than non-EC companies. Of the two EC business types, B2B companies benefited from all but marketing-related e-strategies. B2C companies, in contrast, could only benefit from saving-related strategies.
The non-EC companies only benefited from marketing-related strategies because other e-strategies were specifically designed for EC companies to recover from the EC crisis. Non-EC companies seldom emphasized e-strategies because only a small portion of their revenue was generated online.
For B2C companies, only savings-related strategies significantly affected performance. In the past, the objective of setting up an EC company was to capitalize on the stock market, and spending resources on promoting company potential was critical to impressing potential investors. Unfortunately, the burst of the dot-com bubble forced B2C companies to focus more on savings-related issues, thus giving rise to the influence of savings-related e-strategies on performance. The insignificance of structured-related, policy-related, and marketing related strategies on B2C performance probably had two causes. First, we only investigated 10 B2C companies, which is a small sample size for generalizing conclusive findings. Second, the participating B2C companies were smaller and had less capital and resources to implement e-strategies than the B2B companies.
Some B2B companies reportedly recovered quickly from the EC crisis. This study provides supportive evidence of such a trend. All e-strategies we investigated, except marketing-related strategies, were significant to B2B performance. Several possible explanations exist for the insignificance of marketing-related strategies. First, many of our sample companies were pure B2B companies and did not engage in offline business. Therefore, some of the marketing-related strategies that specified offline strength and evolution to the B2B domain were inapplicable. Second, many B2B companies in Hong Kong provide general services to set up EC infrastructure and maintain Web sites for other companies, and are still far from building their brand names. Third, although many EC research findings have advised B2B companies to find their own market niches, this practice is not prevalent in Hong Kong.
Conclusion
In general, non-EC companies in the GEM performed better than their EC counterparts. Within the EC segment, B2B companies performed better than their B2C counterparts. We also found that many EC companies had introduced four different types of e-strategies to revamp their performance. A majority of both EC and non-EC companies found these e-strategies important to their company performance. Our statistical evaluation suggested that savings-related strategies were the most effective for the B2B and B2C companies, whereas marketing-related strategies were only effective for the non-EC companies. Of the three business types, B2B companies benefited most from the e-strategies that we investigated.
References
1. Coltman, T., Devinney, T.M., Latukefu, A., and Midgley, D.F. E-business: Revolution, evolution, or hype? California Management Review 44, 1 (2001), 5788.
2. Edelman, D., Bhola, C., and Feiler, A. Keeping up with the 'e-generation.' Marketing News 31, 18 (Sept. 1, 1997), 12.
3. Gallaugher, J., Auger, P., and BarNir, A. Revenue streams and digital content providers: An empirical investigation. Information & Management 38, 7 (Aug. 2001), 473485.
4. Urban, G.L., Sultan, F., and Qualls, W.J. Placing trust at the center of your Internet strategy. Sloan Management Review 42, 1 (2000), 3948.
Tables
Table 1. Performance comparisons of EC and non-EC companies.
Table 2. E-strategy types and their perceived importance.
Table 3. (a) Correlation analysis of e-strategies and performance. (b) Results of the moderating effect of business types on strategy-performance relationship.
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