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A Transaction Structure Approach to Assessing the Dynamics and Impacts of 'Business-to-Business' Electronic Commerce

Richard Hawkins
Pascal Verhoest
Netherlands Institute for Applied Scientific Research (TNO)

Abstract

This paper proposes some ways forward in stimulating and structuring interdisciplinary research on business-to-business electronic commerce. A ‘commerce-centered’ perspective is proposed that is grounded in concepts of commerce as a complex socio-economic institution. On this basis, a conceptual framework is developed for assessing the dynamics and impacts of electronic commerce in the value chains of products and services. The approach focuses on examining technical change in transaction structures, and how this relates to the evolution of electronically-mediated business relationships in the rapidly developing Internet environment. The approach is oriented towards critical research questions concerning the effects of electronic commerce on the ways various market participants exercise and/or respond to control over the organization and operation of value chains, and the implications for business, the public interest and policy. The practical research possibilities of the transaction structure approach are then discussed as oriented toward a comparative analytical framework.

Electronic Commerce as a Research Problem

Electronic commerce has the potential to have profound social and economic impacts. However, research into many of the fundamental questions regarding electronic commerce still lags far behind performance expectations for this rapidly evolving medium. In 1997, an OECD report noted several key questions for research including “the long-term consequences of electronic commerce for competition and competitiveness, the effects on prices, the influence on enterprise mobility, the effects on consumer behavior, and the implications for the institutional structures that govern and facilitate commercial activities” (OECD 1997). Several years on, research has made only modest contributions to our understanding of these important macro issues. Our empirically-grounded understanding of the systemic effects of electronic commerce is still at an elementary stage.

Much of our current knowledge about the dynamics and impacts of electronic commerce remains based on short-term observations of individual and often highly selective cases--examining electronic commerce activities that are noteworthy, but otherwise not ‘typical’ when viewed in the context of the economy as a whole. Where a more longitudinal approach has been taken, the main focus has been almost solely on economic activities that involve the production and distribution of ‘producer goods’ in the information and communication technology (ICT) sectors, or the use of these technologies in especially visible commercial contexts. The practice and potential of electronic commerce in the rest of the economy remains something of a blind spot. Moreover, most research on Internet-based commerce concentrates rather narrowly on the consumer interface, whereas it is generally acknowledged that the bulk of its economic potential resides at the ‘business-to-business’ level (OECD 1999).

The main focus of this paper is business-to-business electronic commerce. This can encompass any form of commercial transaction that is related primarily to providing goods and services to ‘customers’ (usually firms and organizations) who themselves procure these goods and services for commercial or analogous purposes. Business-to-business customers add value to the items they procure, either directly through the transformation, configuration or distribution of raw materials, components, finished products, services and human resources, or indirectly through the consumption of procured items within production processes. This contrasts with the ‘business-to-consumer’ scenario in which the final customer acquires goods and services primarily in order to consume their value. There can be close linkages between business-to-business electronic commerce and the consumer interface. For reasons of clarity, however, we will consider that the consumer dynamic represents a different order of research problem, one that goes beyond the scope of the present exercise.

Although the Internet is now considered to embody the future of electronic commerce, most business-to-business applications are still mounted on non-Internet platforms. Electronic Data Interchange remains the most common business-to-business platform, but EDI operates in essentially a ‘closed’ network paradigm, with access normally being restricted to discrete groups of traders. Nevertheless, research on EDI provides an important historical base-line from which to approach pressing current questions about the impending role of the Internet in business-to-business commerce. EDI has been examined extensively in terms of the economic, organizational and political issues that arise from the electronic mediation of business and market relationships. This body of research suggests strongly that business-to-business electronic commerce has very different effects on different actors, depending upon their positions and roles in various supply chains. In the process of facilitating transaction efficiency, technology can be used to shape business structures and practices in ways that favor the commercial interests of some actors over others (Brousseau, 1994; Copeland & McKenny, 1988; Guerin-Calvert et al, 1991; Howells & Wood, 1995; Spinardi et al., 1997).

The current research challenge is to determine the extent to which the ‘closed’ business network paradigms of the past will be replicated in the otherwise ‘open’ environment of the Internet, or otherwise be replaced by a new ‘logic’ of open commercial networking (Senn, 1998; Threlkel & Kavan, 1999). By any description, electronic commerce poses many conceptual challenges for research in that it juxtaposes the broad problématique of commercial behaviors and practices onto the equally broad problématique of the technological mediation of social and economic relationships.

As a result, it is widely acknowledged that electronic commerce research should be interdisciplinary (NSF, 1999; OECD, 1999). However, a difficulty with interdisciplinary research lies in co-ordinating the insights and knowledge gained using different theoretical perspectives and empirical techniques such that new findings can be evaluated and compared in mutually reinforcing ways. In this paper, we propose some steps forward in the co-ordination of knowledge and research in this complex field.

Until comparatively recently, most research has tended to approach the subject of electronic commerce from the ‘electronic’ perspective, focusing on the impact of electronic media on commercial activities. Studies from this perspective have tended to concentrate on three types of criteria: diffusion of electronic commerce media, volumes of electronically-mediated production and exchange, and transaction efficiency. Diffusion indicators purport to show the scale and scope of electronic commerce. They are available from a plethora of commercial and non-commercial sources and have proliferated to the extent that they dominate the discourse on electronic commerce metrics. However, most diffusion data provide rather superficial and circumstantial evidence, especially in the business-to-business context. Many methodologies are derivative, based on assumptions about the relationship between phenomena like Internet penetration and the propensity of Internet users to engage in commerce using this medium. Diffusion studies suggest that changes are occurring in the ways commerce is conducted, but otherwise add very little to our understanding of what these changes are, or how and why they occur.

Research related to ‘volumes’ improves the picture in that it focuses on real commercial activity rather than simply on the availability of infrastructure and media. Various volume indicators have been used including technology investment data, demographic data on Internet-related skills and employment, and on-line sales data. Here again, however, measuring growth in these areas does not in itself indicate why growth is occurring, much less why rates of growth may not be consistent within and between countries, sectors and product types. Moreover, existing high-profile research programs of this kind tend to focus on product and service types that are especially significant and visible in a digital environment.1

Efficiency-oriented research has its roots in the issue of transaction costs. An obvious possibility for electronic commerce is that efficiency might be increased through centralised automation of production and distribution processes and the cutting-out of intermediaries (Garcia, 1995). Another tack with respect to efficiency is that the exchange of market information electronically will by its nature increase the amount of information available to buyers and sellers and reduce search costs, thereby discouraging hierarchical forms of market organization and encouraging more open and competitive market structures (Malone et al., 1987; Wigand & Benjamin, 1996).

In terms of defining a research agenda, however, focusing the discussion of transaction costs too narrowly presents many problems. Most obviously, it is a fallacy that intermediaries always make commerce less efficient. It is now recognized widely that the role and impact of intermediaries is complex, and that the source of many wealth creation opportunities in electronic commerce could well be in the area of new forms of intermediation (Bakos, 1997; Bailey & Bakos, 1997; Hagel & Rayport, 1997; Hawkins, 1998; OECD, 1997; Sarkar et al., 1998; Scott, 2000; Schmitz, 2000).

Furthermore, it is a moot point whether or not open technological architectures like the Internet will necessarily result in more open market architectures. There is evidence that the closed nature of EDI systems often resulted in an asymmetrical distribution of costs and benefits and reductions in the supplier base (Wang & Seidmann, 1995). Likewise, it is becoming obvious that the Internet can be partitioned into closed commercial blocs, thus emulating aspects of the closed EDI environment in an otherwise open network architecture. Ultimately, collective incentives and the structural characteristics of products and enterprises may play a greater role than technology in decisions to explore more open inter-firm relationships (Chesbrough & Teece, 1996; Monge et al., 1998; Steinfield et al., 1996).

The problem with the ‘electronic’ focus in general is that all too often it leads to a linear, supply-oriented analysis that is prone to hyperbole, particularly where Internet-based commerce in concerned. Typically, the dynamics of computer networking are overstated using this approach whereas the human and institutional dynamics that shape commercial practices and processes are understated or even ignored.

As an antidote to these tendencies, and in line with some of the more recent research on electronic commerce dynamics, we propose adopting a ‘commerce’ perspective, i.e. to center the research questions in the evolution of commerce as such, and to explore the emerging dynamics of technical change from the general perspective of buyers and sellers in the market. The research framework proposed below adopts a ‘transaction structure’ approach that focuses on how and why specific groups of traders exchange goods and services in specific ways, and how they interact with evolution in the technological mediation of commercial relationships.

The transaction structure approach begins by considering the most fundamental aspect of all commercial processes: the exchange of value. All commercial processes involve transactions between buyers and sellers in which value in goods and services is exchanged. These transactions occur in structures, the form and function of which is determined largely by the relationship of buyers and sellers to the value of goods and services. Some actors in the market engage in transactions aimed at producing or adding value, while others engage in transactions that allow them to consume this value. Virtually all value exchanges are subject to various forms of mediation. Some forms can be positive in that they add value in their own right and/or facilitate the exchange process. Others can be negative in that they restrict access to goods and services or otherwise inject bias into the market. In electronic commerce, the entire mediation structure is open to revision and reform (Hawkins, Mansell, & Steinmueller, 1999).

Our own preference for a commerce-centered, structural approach is based broadly in institutionalist theories of social and economic behavior and the role of technical change (Dosi et al., 1988; Freeman, 1994; Hodgson, 1998, 1997; Mansell & Silverstone, 1996; Rogers, 1995). The commerce-centered approach builds first on perceptions of commerce as a highly complex socio-economic institution that involves constant interplay between the instrumental (i.e. procedural and technical) mechanisms that facilitate and support commerce and the institutional mechanisms by which the value of goods and services is defined and exchanged.

Probably the most direct treatment of these issues has emerged from a body of thought, extending back at least to Veblen, that considers the dynamics of ‘consumerism: how individuals interact with industrialized systems of production (Lane, 1991; Leiss, 1988; Neice, 1998; Skitovsky, 1976; Twomey, 1998; Veblen, 1899). Nevertheless, most of these ideas are relevant also in the business-to-business context, particularly insofar as they demonstrate the importance of socially-generated structures and norms in defining not only value, but also incentive structures and terms of conduct for commercial activities.

Essentially, commercial processes and structures institutionalize the experiences and expectations of buyers and sellers, be they individual consumers or firms. Business goals of minimising costs while maximizing production efficiency and profit are commonly tempered by institutional factors like habits, customs, social structures and rules (Drumwright, 1994; Granovetter, 1985; Gulati, 1995; Hall, 1999; Martinez & Dacin, 1999). In business-to-business commercial relationships, it is often knowledge, experience and expectations concerning the behavior of suppliers and customers that shapes the structures in which traders transact (Blois, 1999; Credé, 1996; Garcia, 1995; Houston & Johnson, 2000; Molas-Gallart & Hawkins, 1996).

Commerce-centered approaches can build also upon a related set of concepts about the learning capabilities of economic actors when interacting with technical change. Technological innovation is a very significant dimension of electronic commerce. Essentially, we are concerned with how to assess the ‘rationality’ of firm behaviors when interacting with innovation of this kind. In this endeavor we are drawn more to a pragmatic Mertonian definition of rationality as the choice of the most effective available means (Merton, 1968; Rogers, 1995), rather than to a neo-classical economic definition implying the possibility of selecting optimal means.

Broadly speaking, we have proceeded on the assumption that rational behavior in production and consumption processes is ‘bounded’ in the sense of being limited by the information that is available to producers, distributors and consumers at any given time (Simon et al 1992). Where technology is concerned, however, these actors may also learn. Thus, the ‘bounds’ on rational behavior are never fixed - rather, they evolve over time as technical knowledge and skills are developed, assimilated and shared (von Tunzelmann 1995; Dosi et al 1988). Learning within and between firms and organizations can involve a delicate mixture of individual and shared cognition (Brown & Duguid 1991). Intra and inter-organizational learning alliances and networks can be crucial to the innovation process (Nightingale 1999; Nooteboom 1999). Moreover, the characteristics of different industries in different locations can result in highly specialised learning trajectories and production competencies (Lundval 1998, 1992).

Within the above framework, ‘rational’ criteria for decision-making with respect to electronic commerce will be largely situational, influenced in the first instance by historical conditions in individual industries and markets, and shaped over time according to various incentives for trading firms, individually and/or collectively, to acquire the knowledge and competencies necessary to mobilize electronic commerce in their own economic interests. Firm behavior with respect to electronic commerce is likely to vary over time according to the circumstances and experience of different actors in different markets. As a result, any number of ‘rational’ schedules for electronic commerce implementation may co-exist, based on actors' knowledge of different market and industry structures.

The advantage of a commerce-centered perspective informed by the above ideas is that it eliminates an assumption (implicit or explicit) that electronic commerce has universal benefits that should be obvious to all potential adopters, This assumption implies that only a rapid and proactive response to electronic commerce is ever fully rational. This implication has always been highly problematical in a business-to-business context, not least because the activity has been confined heretofore to a relatively small group of actors. For example, it is reckoned that only a small number of large firms were ever proactive in developing and implementing EDI systems (ISO/OECD 1996), and up to this point there is little evidence that more than a relatively few firms world-wide actually use the Internet extensively for buying and selling in the supply chain.

Indeed, available research often tends to show gaps between optimism and commitment in the response of firms to the potential of Internet-based commerce. For example, in 1998, a Europe-wide survey showed that nearly 70% of responding firms did not view the Internet as being an important part of their current business profile, although over 70% expected it to be important in two years. More telling, however, were the attitudinal responses: for example, only about 10% of these firms expressed any preference for discarding traditional methods of sourcing suppliers. Overall, the survey indicated small but steady growth in EDI, but only uncertainty where the potential of Internet-based commerce was concerned (PFA, 1998).

Faced with ambiguity like this, it would be a mistake to conclude that firms simply do not know where their best interests lie. Indeed, observations of firm attitudes and behaviors like the above generate some of the most compelling research questions. Rather than concluding a priori that all firms are rushing to embrace this technology, perhaps we should be asking ‘Why are firms not adopting business-to-business electronic commerce?’ Or, more positively, ‘Under which circumstances will firms adopt business-to-business electronic commerce in which forms?’

In order to understand the dynamics of electronic commerce, it is necessary to understand the forces and signals that may motivate economic actors to enter and exit the electronic marketplace at different times and in different ways. In the short-term, some actors in any marketplace may react more quickly than others to technical change. The adoption of new technology by a dominant firm in an industry sector, or the use of technology by a prominent new entrant to leverage market access may generate imitative behavior and ‘bandwagon’ effects. Other firms may fail to recognize the potential of new technology altogether, thereby incurring the risk of competitive disadvantage. For most firms, however, the acid test is likely to be the ability to articulate realistic product and business models in an electronic environment, and/or to respond to models as articulated by collaborators or competitors.

The transaction structure approach is centered in the relationships between producers, intermediaries and customers in business-to-business contexts. The aim is to focus the theoretical and empirical perspectives of different disciplines on a single problem: namely, how to observe patterns and rates of change as an increasing range of business practices, processes and structures come into contact with electronic commerce. In empirical terms, the transaction structure approach focuses on observing these dynamics in actual value chains (as defined below in a very specific way). It does not minimize the potential importance of examining transaction volumes and costs, rather, it facilitates investigation of these factors in context. Neither does it eliminate from consideration the question of media diffusion. Rather, the approach encourages researchers to extend the scope of diffusion research beyond the simple PC-based Internet interface, to consider the whole range of rapidly evolving technologies that could be used for electronic commerce.

Fundamentally, the transaction structure approach is oriented towards critical research questions that encapsulate the complexity of the electronic commerce problématique in a business-to-business environment. Some of these questions will concern how the introduction of electronic commerce might affect the patterns of control exerted by market participants in various value chains. Others will consider the implications of these changing patterns of control for business, the public interest and policy.

The approach is presented below in two parts. First, a conceptual framework is provided, based in the material discussed above. This sets out the definitions and research parameters of the transaction structure approach. The practical possibilities of the approach are then discussed as oriented toward a comparative analytical framework.

Conceptual Framework

Electronic commerce can be defined as the application of information and communication technology to any of the activities involved in making commercial transactions. However, the driving force behind current interest and debate in electronic commerce is the Internet. Virtually all previous applications of ICT to commercial processes have been in 'closed' network environments, i.e. access and use was restricted to discrete groups of traders, usually within sectors. The Internet offers the potential to trade electronically in an open network environment that in principle is accessible and adaptable to the needs of any trader or type of transaction.

Arguably, electronic commerce in any form has the potential not just to shape market relationships, but also to change fundamentally the ways in which market relationships are shaped (Mansell, 1996; Strader & Shaw, 1997; Zwas, 1998). The basic concept underlying the transaction structure approach is that actors position themselves strategically in the market through the control of transaction points where various types of exchanges occur that relate to the acquisition of goods and services. In the present context, however, ‘control’ of a transaction point does not necessarily mean exclusive control, merely that buyers and sellers are able to access the required transaction points such that they can initiate and complete transaction procedures on reasonably equitable terms.

In principle, the more key transaction points a participant is able to control, the more opportunity the participant will have to influence the structure of the market with respect to specific goods and services. To the extent that electronic commerce facilitates new distributions of the power to control specific transaction points, there can be a reasonable expectation that this will lead to changes in market structures (Doi & Cowling, 1999; Hall, 1999; Mansell, 1996; Mansell & Jenkins, 1992; Stoll, 1992). Thus, transaction points are valuable empirical points of reference for researchers in that systematic observation of change in actual stakeholder behaviors is possible at these points.

A transaction is defined for present purposes as any exchange between participants in a market that is directly or indirectly related to the acquisition of goods and services, irrespective of whether these goods or services are finally acquired. Some transactions involve product and service delivery and the direct exchange of money, but many others are exploratory and involve the acquisition of market information--advertising, personal inquiries, and so forth. By this definition, consulting a catalogue would qualify as a transaction, as would making a telephone enquiry about the price or availability of a product, or conducting an Internet search for a .com Web site. The main operational factor in a transaction is the intent to provide or acquire goods and services. Access to information can be just as vital to the transaction structure as access to the goods and/or services being traded.

All economic transactions consist of two related types of operations: ‘preparation’ and ‘completion.’ Transaction preparation involves placing information about products and services in the market, and retrireview of this information by market participants. These activities are perceived most commonly in terms of marketing and advertising. But in practice, transaction preparation involves all information exchanges that are related to a transaction. Transaction completion comprises two components: settlement and logistics. 'Settlement' refers to ordering, billing and the transfer of payments. 'Logistics' refers to the transfer of products and services from sellers to buyers both within supply chains and with final customers.

However, in electronic commerce, it is necessary to take special account of a third transaction component: production support. By nature, electronic commerce generates huge amounts of transaction-related data. Depending upon the extent of capture and use, these data can be applied to virtually any aspect of the design, production and distribution processes, and they can be mobilized in new ways to create new value chains. In electronic commerce, production support involves competencies in information ‘capture’ and ‘management,’ i.e. the capability to acquire transaction-related information, and the capability to organize, process and apply it. Also involved are competencies in market ‘analysis’ and ‘development,’ i.e. using transaction-generated information to assess market performance and trends, and applying this knowledge to support the development and marketing of new products and services.

The production and acquisition of a typical product or service presents a complex transaction structure, which can be negotiated by many possible configurations of actors. Within this structure, both buyers and sellers initiate various transaction sequences that are intended to culminate in the placement of goods and services with their intended users. However, relationships between the transaction preparation, completion, and production support ‘zones’ that intervene in these sequences are not linear. This is illustrated in Figure 1, which describes these zones with some examples of business functions that are associated with each of them. Figure 1 shows that information generated by transactions in any zone can inform actions in any other zone. Indeed, one of the principal expectations of electronic commerce is that the ability to gather and process transaction-generated information more efficiently across this spectrum will be a source of new commercial opportunities (Hagel & Rayport, 1997; Hoffman, 1996; Sarkar et al., 1998) .

Figure 1. Relationships between business functions in the transaction structure

Examining business relationships in terms of their transaction structures provides a useful general framework for analysing the historical, current and future effects of electronic commerce implementations. Some relationships will be found to be more ‘transaction rich’ than others in terms of the scope and complexity of the transaction structure. Electronic commerce opportunities can be created either by increasing the efficiency of existing transaction processes, or by developing whole new structures oriented towards new product characteristics and the stimulation of new expectations among buyers and sellers. This could include truncating the transaction structure by automating and integrating selected business functions. Alternatively, it could involve wider distribution of business functions among new types of intermediaries.

Arguably, when implementing electronic commerce, the range of possible strategies that could be adopted by a firm to exploit these opportunities will be influenced strongly by the characteristics of existing transaction structures. As discussed above, acquiring control over various transaction points is one of the principal ways through which buyers or sellers gain advantages in a transaction structure. All other factors being equal, it would not be rational (by our definition above) for a firm to embrace electronic commerce if this meant relinquishing existing control over key transaction points. It is unlikely that a firm would accept any weakening of existing advantages in the transaction structure unless new advantages could be identified that would at least counterbalance these effects.

All transacting parties have non-discriminatory access to various common mechanisms like currencies or systems of weights and measures that act to regulate specific aspects of the transaction process. These confer relatively symmetrical advantages on all market participants. In contrast, other advantages can be highly asymmetrical. These usually involve high entry barriers sustained by factors like market concentration, technological dominance or skills concentrations. Most commercial situations fall somewhere between these extremes, but each transaction point can present opportunities for both positive and negative control in terms of the general welfare of all market participants.

It is reasonable to assume that, as a rational actor by our pragmatic definition, a firm would assess a number of factors related to transaction structures before making a substantial commitment to electronic commerce. These would likely include:

Moreover, vendors of electronic commerce platforms, network facilities, software and support services might themselves acquire degrees of control over key transaction points. Key design and operational characteristics of electronically-mediated transaction points can be embedded in hardware and/or software that is proprietary, either to ICT vendors, or in some cases to select traders. At some point, this situation might become prejudicial to the interests of traders in the market, for whom the ability to influence directly the characteristics of key transaction points is a vital business requirement.

Transaction Structures in the Marketplace

Our conceptual framework distinguishes in the first instance between the generic context of the 'market' and the specific context of the 'marketplace.' The 'market' is an allocation mechanism. Through the alignment of supply and demand interests, the market mechanism regulates the allocation and flow of resources. However, this concept is abstract and of limited use in identifying the characteristics of specific transaction structures. These must be situated in a marketplace, a concrete social and economic milieu in which actual transactions take place. A 'marketplace' can be defined in the present context as a specific environment in which the characteristics and dynamics of actual transaction points can be observed through qualitative and/or quantitative research.

An economy has the potential to generate virtually an infinite number of marketplaces. Although some characteristics are common, each individual marketplace can generate specialized transaction characteristics and structures. Typically, moreover, a given marketplace reacts to conditions in other marketplaces, particularly when these are complementary or substitutable in nature. Thus, the market mechanism could be described as being embodied in an array of interacting marketplaces.

The types of interactions between buyers and sellers in any given marketplace vary according to the characteristics of the transaction points. Some marketplaces are 'physical' in that the transaction points require the co-location of buyers and sellers before the exchange of value in goods or services can take place. Others are 'virtual' in that co-location is not a necessary condition; transaction points are designed to accommodate logical rather than physical interactions between buyers and sellers.

The transaction structure approach is oriented to exploring the interplay between technological evolution in the physical and/or virtual design of the marketplace, and evolution in the relationships between buyers, sellers and intermediaries. More specifically, it is concerned with exploring how virtual and physical marketplace characteristics interact. Much commerce is ‘inter-modal,’ requiring physical as well as electronic facilities and infrastructures.

The design of the marketplace in terms of how transaction points are accessed and used influences the level and quality of interactivity between buyers and sellers (Stoll, 1992). In turn, this sets limits on the extent to which transacting parties control the production, processing, storage and retrireview of transaction-generated information. Marketplace design determines also the physical and virtual boundaries within which new transaction structures can develop.

However, in the expectation that parties who historically have control in a marketplace will try to maintain or enhance this control, change is likely to depend not only on the roll-out of new technology but also on the management of technological legacies. Some traders in some marketplaces will use new technology to leverage new transaction structures for new products and services, but others can be expected to reinforce existing structures, especially where there are significant incumbent advantages in the market and/or entrenched technological path dependencies. Evolution in transaction structures will be an important indicator of changes in this balance.


Mapping the Evolution of Transaction Structures in Firms

At any given time, different firms can be in different relationships to electronic commerce. The rate and level of diffusion for electronic commerce in a given marketplace must be determined with reference to these relationships. At the present time, many (probably most) firms are still involved in making basic decisions about whether or not to implement electronic commerce, or which approaches to adopt. Other firms have implemented systems already, and may be involved in adapting them in order to meet newly emerging business requirements. Still other firms may be implementing electronic commerce systems in support of entirely new business activities.

Our definition of electronic commerce is firmly centered in the application of ICT to the transaction. By this definition, the loci of technical change in an electronic commerce context are the transaction preparation, transaction completion and production support zones as described above. The application of ICT to any transaction point in any of these zones may be considered to be an innovation to the extent that it represents significant technical change in relation to some specific aspect of doing business.2

Innovations can be radical or incremental. Each innovation in the transaction structure can have a variety of intended and unintended outcomes. Some outcomes will appear in the transaction structure itself in the form of reduced (absolute) transaction costs, increased speed, flexibility or reliability. Other outcomes will appear in the form of further innovation outside of the transaction structure as such. Electronic commerce may support and/or stimulate product innovation, i.e. it may facilitate the development of new products and services and/or new product/service features. It may lead also to process innovation, related to how products and services are designed and made. Finally, it may facilitate relational innovation, new modalities and methods for buyer-seller interactions in the marketplace. Some indicative examples of these dynamics are given in Table 1.

Not all innovation necessarily generates advantages that are specific to individual firms. For example, most process and relational innovation relates in some way to efficiency considerations and best practice. This kind of knowledge tends to be fungible, easily transferable to competitors who can learn from first-movers by example. Indeed, where it is particularly obvious that a new technology or procedure would benefit all actors in a marketplace, collective action is a possibility, as when competitors establish a common technical standard or agree to abide by an industry-wide code of practice. Transferable effects tend to generate highly dynamic network phenomena that encompass wider groups of actors in a given marketplace.

Strategic advantages tend to flow from innovation that is non-transferable, or at least asymmetrical in that its benefits do not apply proportionately to all actors in the value chain. It is widely accepted that most strategic advantages are generated primarily by product innovation, the development of new products and services (Porter, 1996). In electronic commerce, however, there is a particularly close interrelation between products, processes and relations, in that the repercussions of innovation in one area can spread extremely rapidly throughout the others. Process and relational innovations are now often regarded as sources of new product models, the so-called ‘reverse product cycle’ (Barras, 1990, OECD, 1999).

Moreover, even where the primary goal for innovation is to generate efficiencies, overall efficiency gains can depend to a large degree upon the propensity of all actors in a value chain to embrace the innovations. This means that considerable amounts of technological and organizational co-ordination can be required. To the extent that an individual firm is in a position to take a lead in co-ordinating technical and structural change, considerable strategic advantages may accumulate in that the firm may acquire disproportionate leverage over the way relationships a given marketplace evolve (Hawkins 1996; Schmidt & Werle, 1998; Towill, 1997). In practice, the extent to which a firm might use electronic commerce to leverage any of the dynamics shown in Table 1 for strategic purposes is likely to have significant impact on the structural position and performance of that firm in a given marketplace.

Mapping the relationship of firms to electronic commerce is largely a matter of demonstrating that, at key transaction points, relationships can be observed between innovations in the transaction structure - i.e. in the transaction preparation, transaction completion and production support zones - and product, process, and relational innovations. A conceptual map for linking these observations is illustrated in Figure 2.

As firms become more proactive in their approaches to electronic commerce, i.e. as they use electronic commerce to support or leverage product, process, and relational innovation, they will have to develop strategies that focus on whole value chains. As this occurs, some of the effects of innovation by proactive firms will be transferred to other firms in the value chain, whereas other effects may create benefits that are appropriated mainly by the proactive firms themselves.



Figure 2. Mapping the effects of electronic commerce

As discussed in the previous section, sellers do not embrace electronic commerce voluntarily with the intention of giving up advantages in the market that they enjoy already. Perspectives may change regarding the advantages that can be gained from electronic commerce, but it is rational for traders to become proactive only if they perceive that electronic commerce will confer strategic advantages that are not available in the conventional marketplace (at least, not to the same extent).

Inevitably, many traders will implement electronic commerce primarily for reactive reasons. These can range from contractual obligations to deal electronically with key suppliers and/or customers, to bandwagon effects generated by fear of being left behind by other actors in the marketplace. Reactive rationales are potentially very significant in business-to-business electronic commerce. For example, previous experience with EDI indicates strongly that implementation was led in most cases by a few dominant and proactive firms in discrete sectors, the rest merely reacting to this innovation in order to establish or preserve commercial relationships with these dominant firms (ISO/OECD, 1996; Brousseau, 1994). In the transaction structure framework, the extent to which Internet-based electronic commerce will encourage more firms to engage in more proactive electronic commerce strategies remains an open and very significant empirical question.

Focusing on Value Chains

The value chain device was proposed originally as a means to examine the value-added structure of the firm (Porter, 1985). However, in an electronic commerce environment the boundaries of the firm can become somewhat more difficult to define, leading to debates about the nature of the relationship between value-chains within firms and ‘value systems’ between firms (Benjamin & Wigand, 1995). Moreover, difficulties have been noted in applying the value chain concept in any form to service industries where the source and characteristics of value can be difficult to determine (Stabell & Fjeldstad, 1998). We define the value chain very simply as a series of production tiers, each tier producing items that are substitutable in terms of the function they assume in a final product or service. This chain culminates in a specific product or service in which all of the value of components and processes has accumulated. Relative to the characteristics of specific products and services of any given type, i.e. allowing for variations in quality and performance, the items produced in each tier have similar value. The units of production in each tier of our value chain formulation are firms and organizations. In many cases, this formulation of the value chain could be identical in practice to a supply chain. For our purposes, however, the value chain device is used primarily to direct attention away from the purely logistical aspects of supply chains and towards the commercial processes through which the value that is added to goods and services in supply chains is exchanged. In research terms, the transaction structure approach focuses on the value chains of products and services rather than narrowly on sectors as such. As such, any number of (competing) firms producing the same type of product are involved in the same basic value chain dynamic. One advantage of this approach is that it is centered on the industrial users of electronic commerce. The roles and effects of ICT are defined and examined from the user perspective, rather than from the perspective of technology vendors. The other advantage is that many value chains involve inputs from firms in several sectors. The value chain focus allows these dynamics to be contained in a discrete unit of research and analysis, i.e. as related to a specific type of product or service.

A stylized model of value chain dynamics in our formulation is presented in Figure 3. The model does not represent a real value chain as such, but it illustrates the various ways and means by which value is added to goods and services. In an actual study, the generic characteristics of the model would have to be ‘fleshed-out’ to reflect the real structure of the value chain for a specific product or service.



Figure 3. Stylized value-chain model.

In order to demonstrate the dynamics of value chains, the production tiers in Figure 3 have been classified as assemblers, sub-assemblers and consumers, with assemblers being the final customers of sub-assemblers, consumers being the final customers of assemblers, and so forth. The point is to show that actors in each tier in the model control similar units of productive activity, each adding similar kinds of value.

Between each tier is a marketplace through which goods and services pass as they go up the value chain. Marketplaces co-ordinate transactions between producers of different raw materials, components, assemblies and products. Intermediaries facilitate transactions in the marketplace. As such, they may not add use-value, but they may add value to the transaction itself by performing specialized transaction support functions. Marketplaces are to be found also within each layer, but these are secondary relationships that do not alter the basic structure of a value chain as such.

Our value chain model draws a simple distinction between producers and intermediaries. Significantly, the model assumes that both groups of actors are potential sources of value, albeit different kinds of value. This is in contrast to approaches that assume intermediation to be primarily a source of lost value through transaction inefficiency. The transaction structure approach leaves the effects of intermediation on transaction costs open as an empirical question.

The value chain model has the further advantage of helping to separate conceptually those implementations of ICT that are related primarily to commerce from those related primarily to routine information exchanges in production systems. Marketplaces provide the locale for electronically mediated transactions. The tiers of productive activity provide the locale for production control systems. The extent to which both of these locales are co-ordinated is an indicator of the extent to which the value chain as a whole is electronically integrated.

Evolution in the transaction structure is likewise a promising indicator of changes in the structure of the value chain. Figure 4 gives illustrations of how changes might be observed in a value chain over time as a result of the implementation of electronic commerce. The value chain representation on the left-hand side of the diagram represents a specific value chain at a point in time t0. The other representations in Figure 4 depict the possible effects of electronic commerce on this value chain at a future point in time tn. The example in the centre demonstrates how electronic commerce may result in greater vertical integration, whereas the example on the right illustrates the possibility of greater horizontal integration.



Figure 4. Evolving value chains.

It is important to note that in different marketplaces, the same firm may operate in different relationships to other actors. Most firms act as both buyers and sellers, i.e. they procure and consume as well as produce. Thus, firms may be buyers in some marketplaces and sellers in others, and may display different characteristics depending on whether their presence in a specific marketplace is oriented to demand-side or supply-side criteria.

Figure 5 sums up the conceptual features of the transaction structure approach as they could be made operational in research terms.



Figure 5. Conceptual features of the transaction structure approach.

The transaction structure is comprised of various transaction points as situated in various marketplaces. Some of the transaction points may involve intermediaries and others may not. As a whole, the transaction structure acts to facilitate the transfer of goods and services between different tiers in any given value chain. The innovations that occur with the implementation of electronic commerce will apply in the first instance to specific transaction points.

Research is focused primarily upon what occurs at specific transaction points as the result of the proactive and reactive behaviors of participants in a given marketplace. Taken as a whole, these behaviors may indicate change in the structure and operation of this marketplace. The actions observed in all of the marketplaces in a transaction structure indicate the implications for evolution in the value chain as a whole.

Applying the Transaction Structure Approach

The main purpose of the transaction structure approach is to facilitate the co-ordination of a multidisciplinary research agenda. As such, the approach is intended to encourage eclecticism in order to explore critical research questions from different theoretical and empirical perspectives, using a range of qualitative and quantitative methods. In the sections that follow, we set out an implementation framework in order to demonstrate how the concepts that underpin the transaction structure approach might be applied to an actual research project.

Dealing with Industry and Sector Dynamics in Electronic Commerce Research

When making the approach operational, allowances must be made for the likelihood that actors involved in different economic activities are likely to approach electronic commerce in different ways and with different expectations. There is a strong possibility that research results overall can be colored by the choice of industries and/or sectors. However, it is possible to contain these problems such that distinctions can be drawn between dynamics that are unique (i.e. to one sector or industry) and those that are not.

If a sector focus is chosen, sectors can be classified according to the different kinds of roles electronic commerce is most likely to play in them. For example, sector characteristics can be assessed a priori in terms of where the potential is strongest for electronic commerce to yield transferable and/or non-transferable benefits. This potential can be assessed both with reference to the characteristics of key products and services in a sector, and to the characteristics of transactions related to these products and services (Verhoest et al., 1999).

To an extent, sectors can be grouped also according to how the material and/or digital characteristics of key products and services relate to transaction characteristics. Arguably, the asset characteristics of products and services can influence buyer-seller relationships throughout the value chain and they can help to define the likely quality and extent of electronic commerce application in given sectors. In some cases, however, certain asset characteristics may be latent, i.e., items that are currently provided in material form could also be provided in digital form. Obvious examples are books and music which can be distributed entirely in digital formats even though this is not currently the preferred practice.

For the most part, however, sector-based influences are somewhat marginalized in the transaction structure approach by its strong focus on value chains. Formal sector classifications are accounting categories that do not in most cases reflect the reality of industrial production, most products being the result of complex interactions between many sectors. In contrast, value chains relate immediately to specific products or services, irrespective of the sector with which they are most directly associated. Using the value chain focus, for example, research into the music industry would look at a specific product like the ‘CD’ or the ‘video’ rather than at the ‘publishing’ or ‘reproduction’ of sound recordings as might be defined in standardized industrial classification nomenclature. By concentrating on the product or service at the top of a definable value chain, electronic commerce dynamics can be explored between as well as within industries and sectors.


Research in the Value Chain

The first substantive step in the transaction structure approach is to specify a generic value chain structure for the selected group of traded products and/or services. Within the overall logic of the value chain framework as illustrated above, virtually infinite variations are possible. The important (and more difficult) next step is to discover what motivates the electronic commerce dynamics of these value chains.

The conceptual framework developed above implies strongly that evolution in the business practices of proactive electronic commerce implementers who also occupy key positions in the value chains for specific products and services is likely to provoke a ‘learning’ response from other firms engaged in the same value chains. By examining changes in these relationships at key transaction points in key marketplaces, knowledge can be gained of changes that are likely to affect the whole value chain. As in principle the motivating force could lie in any value chain tier, the research task is to identify actual or potential electronic commerce leaders within the value chain.

It follows that a reasonable starting point for research using the transaction structure approach is to identify firms in the value chain that are successful in implementing electronic commerce. In this context, 'success' is defined solely in terms of the application of electronic commerce such that significant effects can be observed in the value chain. It is important to note that profitability is not a necessary condition for ‘success’ in this context; profits from electronic commerce may not be immediate for many firms.

Proactive behavior by a firm in one tier of a value chain can create incentives (and possibly imperatives) to respond, both for firms in the same tier and in other tiers. Other types of proactive behavior can be collective. For example, groups of firms occupying similar positions in a value chain can elect to create a common electronic commerce interface.

Accordingly, the research regime would be centered in the first instance on the actions of successful firms at key transaction points in key marketplaces. Relative to each key transaction point, research can describe the nature and extent of electronic commerce activities, and explore the motivating factors, obstacles, and effects (positive and negative). Essentially the same research protocols can be applied to all of the relevant firms in a given value chain.

This process enables researchers to compare and contrast the behaviors of different firms in different parts of the chain. It is likely that some of the innovations established in the value chain by successful firms will generate complementary actions among other firms in the same chain, whereas others may generate independent actions, or even counter measures. In every case, the research will explore evolution in the transaction structure, i.e. changing patterns of control over key transaction points, the elimination of established transaction points and the creation of new ones, the emergence of new types of intermediation and so forth.


Analytical Framework

Behaviors and outcomes within the transaction structure can be observed using a variety of methods and the results could be modelled conceptually in various ways. Nevertheless, research findings as a whole can be mapped and assessed comparatively using common criteria. The basis for establishing these criteria is the innovation framework as illustrated above in Figure 2. Essentially, changes in the value chains can be interpreted in terms of the impact of technical innovation upon the way transactions are conducted.

Figure 2 can be expanded into a simple grid (Figure 6) which relates evidence concerning innovation in the three transaction zones (preparation, completion and production support) to corresponding evidence of impacts on product, process, and relational innovations. Plotting these effects on the grid creates a ‘footprint’ of where electronic commerce is having observable effects in a given value chain, as viewed from the perspective of participants in that chain, along with an indication of the nature of these effects. Applied on a cross-sectional basis, the grid approach acts mainly to organize and demonstrate research findings. Applied over time, sequences of footprints could be generated that could illustrate the evolution of transaction structures.

The grid as shown in Figure 6 is open ended - i.e. all of the specific innovations (I1…n) that were identified in the research are displayed individually on the grid. This approach might be useful where a large amount of detail is desired, but in many cases a higher level of presentation may be preferable. In this case, pre-defined, general categories of innovation in the transaction zones could be complemented by similarly aggregated categories of product, process and relational innovation. This variant is illustrated in Figure 7 (using the examples of general categories given in Figure 1).

Background research and the overall structure of the value chain can provide context within which to interpret a grid footprint, i.e. to attribute innovations and effects to various actors, and to gauge their scale, scope and significance. With the aid of these footprints, significant trends can be detected that can be used to construct exploratory scenarios for the likely evolution of value chains. These exploratory scenarios will show how the historical configurations of specific value chains are likely to be restructured as a result of the actions of firms who are proactive in implementing electronic commerce, and the reactive and/or complementary actions of other firms.

The objective will be to show the extent to which non-transferable effects from innovation have resulted in competitive advantages for some firms, and how transferable effects have permeated the value chain as a whole. In so doing, the information contained in the footprints can be used to support the construction of hypothetical value chains at future points in time as illustrated above in Figure 4.

Summary

The above discussion proposes some ways forward in stimulating and structuring interdisciplinary research on business-to-business electronic commerce. The paper advances the idea that the ‘electronic’ focus is inappropriate for assessing evolution in commercial activity as the methodological assumptions involved are overly narrow, linear and oriented to the supply of technology rather than to its use. Instead, a ‘commerce-centered’ perspective is advocated that is grounded in concepts of commerce as a complex socio-economic institution. Crucial to this approach is the examination of innovation in transaction structures, and how this relates to innovation in the value chains of actual products and services. The transaction structure approach focuses research on the dynamics of the 'marketplace,’ the physical and/or virtual environment where commercial transactions take place. The approach focuses on discovering what firms and organizations actually do with technology in order to pursue, preserve and expand their commercial interests.

Basic to the transaction structure approach as a whole is the observation that the implications of electronic commerce at the business-to-business level will not be the same for all economic actors. Nevertheless, the effects and impacts of electronic commerce are likely to be systemic. Some actors may be more proactive than others in implementing electronic commerce, but the effects and impacts will tend to affect all of the actors involved in a business relationship. To the extent that proactive firms can use electronic commerce to leverage their positions in given value chains, they may acquire considerable influence or control over the ways in which electronic marketplaces develop. This has serious implications for business strategists and policy-makers alike. Understanding these dynamics requires knowledge of how the effects and impacts of electronic commerce percolate throughout the whole range of business practices and production processes.

Footnotes

1. For example, the program on electronic commerce metrics at the Center for Research on Electronic Commerce at the University of Texas divides the ‘Internet economy’ into four layers. Three layers are concerned entirely with information and communication technology products. The remaining layer contains only products and services that are defined by their actual or potential digital characteristics: general on-line retailing, on-line ordering of computer hardware and on-line software distribution, transport ticketing, entertainment and professional services, and logistics (CREC 1999).

2. We acknowledge that there is a longstanding debate on the nature and definition of ‘innovation,' as opposed to ‘invention’ or ‘technical change’ as such (Freeman 1994). Broadly speaking, we accept the characteristics of innovation as laid out in the OECD’s Oslo Manual for the collection and interpretation of innovation-related data (OECD/Eurostat, 1997). In this formulation, ‘innovation’ involves “changes which require a significant degree of novelty for the firm,” as applied to products, processes and “organizational” dynamics. We diverge from this description only insofar as we place extra emphasis on the interplay between technical change and organizational behavior in an electronic commerce context.

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About the Authors

Dr Richard Hawkins is a political economist specializing in electronic network issues, with special emphasis on standardization and electronic business. He holds B.A. and M.A. degrees from Simon Fraser University (Canada), and a D.Phil. from the University of Sussex (UK). He is currently Senior Advisor on Information and Communication Technology Policy to the TNO Institute for Strategy, Technology and Policy TNO-STB. Formerly, he was Senior Fellow and Lecturer at SPRU - Science and Technology Policy Research, at the University of Sussex. In addition to academic work, he has been active internationally as a policy consultant and advisor. Clients have included the European Commission, the OECD, the UK Department of Trade and Industry, the UK Office of Science and Technology, the European Committee for Standardisation (CEN), the Italian Communications Regulatory Authority, the International Labour organization, the London Metropolitan Police Service, the British Standards Institution, and the Government of Canada.
Address: Netherlands Institute for Applied Scientific Research (TNO), Schoemakerstraat 97 2600 JA, Delft, The Netherlands. Tel. +31 (0)15 269 5447 Fax. +31 (0)15 269 5460.

Pascal Verhoest is Senior Researcher and Advisor of TNO-Strategy, Technology and Policy (the Netherlands), managing director of ENCIP, the European Network for Information and Communication Perpectives, and {rofessor of Information and Communication Policy at the Free University of Brussels (Belgium).
Address: Netherlands Institute for Applied Scientific Research (TNO), Schoemakerstraat 97 2600 JA, Delft, The Netherlands. Tel. +31 (0)15 269 5453 Fax. +31 (0)15 269 5460.

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