Business Transformation and Channel Systems
- How digital interactive information technology changes strategies
and structures in supply chains and channel systems -
In the early 1990s newspapers and magazines
were caught off guard when consumer online services like America
Online (AOL) emerged to compete for their audiences and advertising
fees. Today, many retailers, manufacturers, and service providers
across many consumer goods categories are carefully watching the activities
of electronic retailers like Amazon, online auctioneers
like eBay, and digital audio and video distributors like Apple's
iTunes and Real that use Internet and Web technology to develop electronic
relationships with individual customers. These new electronic market
makers and electronic intermediaries are not merely new entrants;
they often preempt traditional sales and distribution channels, arrogate
the customer connection, and thus usurp the revenue stream. From an
organizational perspective they start to change the structure of entire
supply chain and channel systems (Holland and Lockett 1997, Fulk and
De Santis 1995, Grandori and Soda 1995, Huber 1986).
Organizational change is further fueled
by continuous enhancements of Internet and Web technology such as
Web services standards. While the Internet has improved interconnectivity,
Web services technology is explicitly designed to support interoperable
machine-to-machine interaction over a network (www.w3c.org).
The use of Web services technology could, therefore, more easily facilitate
a business network structure that includes more nodes or business
partners, and interaction between them (Hagel and Brown 2001, Patil
and Saigal 2001, Hars and Schlueter Langdon 2002). Newspapers, trade
journals, and consultants often refer to this as the emergence of
business networks, value webs, etc. (e.g., The Economist
However, very often it is unclear how a company would benefit from
adopting a network structure. Many firms are already struggling today
with too much complexity in supplier and channel relationships.
Even within organizations, many companies work hard to identify a
structure that maximizes performance across product, market, and production
Strategic Importance of
Information systems and particularly software are quickly emerging
as a new "factory." In content industries incumbents are
left with questions whose answers will not only redefine relationships
with many traditional business partners but with entire industries
such as communications and IT: To what extent should traditional "content"
creators and distributors be involved in digital infrastructure? And
what shape should this involvement take? Should content companies
own digital distribution systems or should they influence the design
of key technology standards for digital distribution systems?
"Make or Buy"
In the U.S. cable television industry, multiple systems operators,
including Time Warner Cable, have used ownership of coaxial cable
infrastructure to gain control over access to content and programming
by tens of millions of subscribers. In 2000, TWC temporarily took
Disney's cable channels off-line to better negotiate lower programming
cost. As a consequence, many content creators are responding to this
vertical foreclosure threat by integrating forward into distribution.
In the area of online or Web-based services, digital infrastructure
extends beyond communication networks to include human computer interfaces
(such as the Windows operating system screen), as well as software
applications (such as the Web browser). Some content companies rely
on third-party technology to provide a human computer interface. Others,
such as AOL, maintain their own user interface, integrating innovative
software applications into it, including Web browsing capability.
As of today, no best-practices approach has been
identified. Mr. Levin, the former CEO of AOL Time Warner, has said
that "he was clashing regularly with Mr. Case, then chairman
of AOL Time Warner, about 'convergence,' or the melding of
different technologies. Mr. Case wanted the company to spend heavily
on it; Mr. Levin disagreed, arguing that resources should be spent
on existing market opportunities instead" (Cauley 2003).
Approach and Findings
I have used the structure-conduct-performance approach
of Industrial Organization theory (Mason 1939, 1949; Bain 1956, 1968)
and case study analysis to derive a classification concept for organizational
analysis in electronic channel systems. This concept
is called "2-3-6."
A 1996 study, conducted under the auspices of the
European Commission applied the "2-3-6" concept to investigate
how the Internet has changed industry structures in European publishing
Findings suggested that business opportunities and
challenges would fall into 3 distinct categories of convergence
studies have shown that these categories have also emerged in other
industries (Langdon and Shaw 2002).
Experiment with "2-3-6"-based analysis:
Please click on 2-3-6
Currently, research is focused on several issues
that undergird the link between IT investments and the creation of
value across business relationships. We examine strategies that involve
knowledge sharing, operational linkages across channel
participants, and customer involvement. Research hypotheses
are tested using data gathered with survey instruments. The surveys
are designed as one-shot, cross-sectional studies. Data collection
is focused on industries that are widely known to adopt IT early and
use it heavily. Therefore, primary targets are firms in high-technology,
communications, and financial services (i.e., Aberdeen Group 2002):
Collection: "Building Strong Customer Relationships
Connections--Aligning Your Customer And IT Strategy With a Networked
Please participate in phase 3 of our data collection effort (Fall
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Chris Langdon gratefully acknowledges the advise
and thoughtful suggestions on channel system research of Gary L. Frazier,
the Richard & Jarda Hurd Professor of Distribution Management,
at the USC Marshall School of Business in Los Angeles.
Chris Langdon would like to thank the Center for
Telecommunications Management (CTM) at the USC Marshall School of
Business and its former director, Professor Jack Borsting, dean emeritus
of the USC Marshall School, and the original holder of the E. Morgan
Stanley Chair, for a research grant that has supported some of the
work in this project area in 2000-2001.
Chris Langdon gratefully acknowledges the many discussions
with Bernie Jaworski, a co-founder and Managing Director of Monitor's
Marketspace. In February 2002, Bernie was honored with the first-ever
Sheth Foundation/Journal of Marketing Award for his 1993 article,
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