pure plays versus brick and clicks: performance implications of
TRANSCRIPT
Pure Plays Versus Brick And Clicks: Performance Implications of Internet-based Electronic Commerce Marketing Strategy and Channel Structure
Howard S. Rasheed, Ph.D. Assistant Professor
Scott Geiger, Ph.D. Assistant Professor
University of South Florida
4202 E. Fowler Ave. BSN 3403 Tampa, FL 33617
813-974-1727 [email protected]
keywords: electronic commerce, Internet, brand equity, channel of distribution
Under Review at:
Journal of Business Ventures
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Pure Plays Versus Brick And Clicks: Performance Implications of Internet-based Electronic Commerce Marketing Strategy and Channel Structure
Abstract
Pure plays use the Internet as a market entry strategy and brick and clicks use the Internet as an
alternate channel of distribution. Several theoretical frameworks are used to explore strategic
and performance differences between business models. Results from a sample of 240 firms
engaged in Internet-based consumer marketing suggest that brick and clicks are more effective
than pure plays at using the Internet for brand equity building. Moreover, brick and clicks also
enjoy higher profit expectations. However, using the Internet as a channel for sales transactions
has a negative impact on profit expectations for both business models.
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1. Executive Summary
Recent dot-com failures have raised a cloud of suspicion over the viability of new
ventures known as pure plays, which characteristically enter new markets exclusively via the
Internet. Many of these firms have met with unfavorable reaction from the financial markets due
to lack of profits and weak capital infrastructure. The strategic efficacy of the pure play model is
critical in light of forecasts projecting total Internet electronic commerce ranging between $1 and
$1.3 trillion by 2003, while the business to consumer sales portion is expected to reach $180
billion by 2004 (The Economist, 2000).
Incumbent firms, otherwise known as brick and clicks, use Internet-based electronic
commerce to diversify their distribution channel or supply chain management strategy. Channel
research in the marketing literature has recently focused on Internet-based electronic commerce
as a part of the firm’s multiple channels of distribution strategy (Geyskens, Gielens, & Dekimpe,
2002). However, not all traditional retailers have embraced the Internet for fear of
cannibalizing existing market share (Enders & Jelassi, 2000). Business models designed to
incorporate Internet electronic commerce must therefore complement existing channel structures
to avoid channel conflicts.
Amit & Zott (2001) argued that electronic commerce business models facilitate value
creation by addressing unique questions of entrepreneurship and strategy theory that transcend
the traditional boundaries of the firm to encompass virtual markets and networks of firms. Both
models constitute an entrepreneurial strategy in the sense that pure plays use the Internet as the
basis for a new venture, whereas brick and clicks use the Internet as an innovative exchange
mechanism. Because these business models and technological innovations are dynamic and
contemporaneously evolving, prior research related to e-commerce business models is limited.
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The current study adds to the literature by addressing three research questions: First, is
there a difference between new ventures and incumbent firms in terms of three types of
performance: e.g., profit expectations; revenue growth; and international revenue growth?
Secondly, do differences exist between the two business models with regards to marketing
experience and marketing strategy efficacy? Finally, are market performance outcomes of both
models impacted by marketing expenditures, channel structure, and channel intensity?
Data were gathered from information system managers of 240 firms engaged in Internet-
based consumer marketing, using a key informant survey technique. Of the sampled firms, 58%
indicated that they had a marketing presence prior to using the Internet (brick and clicks), while
42% used the Internet exclusively as the basis for a new venture (pure plays).
For managers, this exploratory study indicates that brick and click firms enjoy an
advantage over pure plays in advertising and promotion strategy effectiveness and brand
recognition. Brick and click firms also have higher profit expectations than pure plays, and are
more effective in using offline website promotional strategies than pure plays. The only area in
which pure plays were more effective was in the use of search engines, as well as, international
revenue growth. Based on the study results, managers should be cautious about the profitability
of using the Internet to execute sales. However, the Internet could be an effective tool for
information dissemination. Furthermore, digitized products that can be distributed over the
Internet could serve as an important source of international revenue for new ventures.
For researchers this study provides preliminary insight on theory building related to
performance models for consumer marketing. Particularly, it extends channel distribution and
brand equity development literature to Internet-based electronic commerce, in the context of new
venture market entry and diversification of traditional channel marketing strategy.
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2. Introduction
Information technology (IT) has played a dominant role in the emergence of innovative
business models within the strategic management paradigm over the past decade (Venkatraman,
1994). IT has provided the capabilities for firms to redefine boundaries of markets, structural
characteristics, alter the rules of competition, and redefine processes, networks, and business
scope. As a recent IT innovation, the Internet serves as a multilateral and inter-organizational
information system for business strategy implementation (Hoffman, Novak, & Chatterjee, 1996)
and a media for distinct business models of market entry strategy (Kiang, Raghu, & Shang,
2000).
Some theorists further suggest the advent of Internet-based commerce presents a strong
case for the confluence of entrepreneurship and strategy (Amit & Zott; 2001; Hitt & Ireland,
2000; McGrath & MacMillan, 2000). Amit & Zott (2001) argue that innovative models that
facilitate Schumpeter’s idea of creative destruction “not only apply to products, production
processes, distribution channels, and markets, but also to exchange mechanisms and transaction
architectures” (p. 511). Internet-based information technology therefore, represents a recent
entrepreneurial opportunity for innovating markets and exchange mechanisms. As such,
business conducted over the Internet can be an important source of value creation for
entrepreneurial start-ups and corporate ventures (Amit & Zott, 2001).
Generally, information technology creates value by supporting differentiation strategies
at various steps in the value chain by raising revenue or lowering costs (Amit & Zott, 2001).
Whether the added value from revenue generation becomes a sustainable competitive advantage
for firms depends on whether the firm’s brand equity transfers to, or is established in the new
media (Aaker, 1991; Bharadwaj, Varadarajan, & Fahy, 1993). Other researchers, however,
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question whether resources (Barney, 1991) embedded in Internet-based information technology
provide a sustainable competitive advantage because the technology has become generic and
widely available to competing firms, thereby eliminating distinct cost disadvantages in
developing, acquiring, or using the technical infrastructure (Mata, Fuerst, & Barney, 1995).
Consequently, business models using Internet-based commerce may, at best, be viewed as a
temporary source of competitive advantage or a source of competitive parity.
One newly evolved model, know as “pure plays,” are new venture firms that use the
Internet exclusively for new market entry. These firms manifest as new start-ups (greenfield) or
corporate venture spin-offs for the purpose of market development. The other model, known as
bricks and clicks, is a hybrid arrangement in which incumbent firms use Internet electronic
commerce as a technology media for diversifying their distribution channel. Firms using this
model are typically established firms with existing management, organizational structure, and a
physical presence in the form of a retail store, warehouse facilities, and a complementary
logistics system. These traditional companies have, in some cases, viewed the innovation of the
Internet as a “disruptive technology” that is difficult to embrace due to the cultural inertia and
sunk costs associated with established business models and stakeholder relationships (The The
Economist, 2000). Traditional perspectives suggest changing distribution channels could cause
disruptive conflicts and lead to a dysfunctional exercise of power (Gaski, 1986; Rangan,
Menezes, & Maier, 1992). For the remainder of this study we will interchangeably refer to
incumbent firms utilizing the Internet for electronic commerce as bricks and clicks, and new
ventures utilizing the Internet exclusively for market entry as pure plays.
There are four basic types of companies that use the Internet in the core of their business:
(1) e-commerce companies that market goods over the Internet; (2) content aggregators who
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gather and display content from multiple sources; (3) market makers that act as intermediaries or
conduct electronic markets; and (4) service providers who furnish Internet based services (Afuah
& Tucci, 2000). Of the firms that market goods over the Internet, companies are further
classified as business-to-business or business-to-consumer models, based on the nature of the
end customer. This study focuses on firms that used the Internet exclusively for a new venture
entry into consumer marketing (B2C), either exclusively (pure play) or firms that used the
Internet as part of the diversification of their B2C channel distribution system (brick and click).
3. Theoretical Development
Research related to the Internet as a distribution channel and as model for new venture
market entry is sparse. This study uses extant literature associated with multiple channels of
distribution and marketing strategies for building brand equity to develop a performance model
for Internet-based electronic commerce.
3.1 Multiple channels of distribution
The use of multiple channels of distribution is becoming the prevailing strategy in
consumer marketing (Frazier, 1999). Prior research has focused on the performance implications
of a supplier’s single channel decision (Jeuland & Sugan, 1983; Lai, Little, & Villas-Boas,
1996). The performance expectations of the Internet as an additional channel for incumbent
firms are very uncertain, however (Ghosh, 1998; Booth, 2000). According to Geyskens et al.
(2002), although the Internet as an additional channel may “increase firms’ penetration levels
and decrease their distribution costs, increased consumer price sensitivity and lowered levels of
support in the entrenched channels may become liabilities” (p. 102). Their research found that
the stock market reacts positively to investments in Internet channels in 70% of the cases studied.
Because so many firms experienced negative returns (30%), Geyskens et al., (2002) emphasized
the need to understand what drives the success of the Internet as an additional channel. They
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concluded that success is contingent on the power of the firm realized through an entrenched
channel. Although firms can expect to loose some of the goodwill associated with their existing
channels, they can use their channel power to enforce agreements with distributors. Since only
incumbent firms with existing channels of distribution can exert this type of market clout, it is
expected that they will have better stock returns. Conversely, Geyskens et al. (2002) found that
established firms are financially hurt when adding a new Internet channel to an entrenched
channel system, due to cannibalization and brand-damaging inter-channel conflicts. Amit & Zott
(2001) also argued that innovative business models have the potential to disrupt existing industry
structures and thereby pose a threat to incumbents. Based on these equivocal findings, more
empirical exploration is needed to better understand performance outcomes of Internet-based
distribution channels. Consequently, we offer the following research question:
RQ1: Do differences in performance exist between brick and click and pure play firms?
3.2 Brand Equity
Research involving entry strategy and performance has considered a number of
managerial decisions that affect performance, including building brand equity, brand
identification, and brand names (Keller, 1993; Lambkin, 1988; Miller, Spann, & Lerner, 1991;
Schrader & Simon, 1997; Tsai, MacMillan, & Low, 1991). A popular perspective suggests
brand equity is a source of added value and sustainable competitive advantage for firms (Aaker,
1991; Bharadwaj et al., 1993). It has also been considered a successful strategy for
differentiating a product from competing brands, creating competitive barriers, as well as
increasing cash flow (Yoo et al., 2000). Corporate CEOs believe that brand equity is an
indicator of long-term marketing performance and a benchmark for improving sales and profit
(Baldinger, 1992). Moreover, a survey of Marketing Science Institute members ranked brand
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equity the number one issue facing marketing management (Aaker, 1991; Cobb-Walgren, Ruble,
& Donthu, 1995; Zimmer, 1994).
There are a number of distinctions between the channel structures of pure play and brick
and click models, based on brand equity strategies. Unsupported speculation in the popular press
suggests that brick and click firms using a multi-channel business model should have significant
advantages over pure plays (The Economist, 2000). For example, they typically have an
established brand name, a large customer base and strong links with suppliers (Enders & Jelassi,
2000). They also have the advantage of physical establishments such as stores, warehouse, and
delivery trucks that facilitate customer fulfillment and satisfaction. Lastly, established firms
typically have a large database that can be used to target customers. Consequently, incumbent
firms may need to spend less than pure plays on marketing (The Economist, 2000). This is a
significant distinction considering the variance in customer acquisition cost. According to a
McKinsey study, brick and click retailers spend only US$5 to bring an existing customer online,
compared to US$445 per pure play customer (Kiang et al., 2000).
Whether brick and clicks have a market performance advantage is not clearly established,
however (Hensmans, van den Bosch, & Volberda, 2001). The problem for incumbent firms is
that the Internet represents a new distribution channel, which may not create a new market or
additional sales, but redirect existing sales from other channels. As a result, brick and click firms
moving into Internet electronic commerce run the risk of channel conflict. To avoid channel
conflict some incumbent firms have set up separate online subsidiaries. Physical retailers also
face challenges of organizational restructuring and the adaptation of their existing distribution
infrastructure to the divergent demands of the online market (Kiang et al., 2000). The logistics
associated with the massive flow of goods from warehouse to retail shelves presents different
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challenges than the infrastructure needed to satisfy the micro demand of individual consumers
over the Internet. Online retailing requires more entrepreneurial processes and decision making
to accommodate the flexibility necessary for Internet-based commerce (Kiang et al., 2000).
Consequently, incumbent firms sometimes spin-off ventures to accommodate different
compensation packages for highly competitive technical markets, limit the financial damage to
parent financial statements, and provide an independent basis for performance evaluation.
On the other hand, Internet-based commerce in the business-to-consumer realm has
distinct advantages such as wide reach, exhaustive product selection, few infrastructure
requirements, unlimited hours of operational access, and a high degree of scalability (Kiang et
al., 2000). The primary obstacle is the building of a brand name. The cost of bringing a new
brand to market has been estimated at US$100 million (Ourusoff, 1992; Cobb-Walgren, et al.,
1995). However, due to the proliferation of web offerings a distinctive brand name is difficult to
establish, not to mention, challenges of trust, customer service, and unreliable outsourcing of
distribution systems. Thus, both business models appear to have advantages and disadvantages.
Aaker (1991) set forth five categories of assets that lead to brand equity: 1) brand loyalty,
2) name awareness, 3) perceived quality, 4) brand associations, and 5) proprietary brand assets
such as patents and symbols. Furthermore, brand equity has been conceptualized as the value of
a brand name in terms of customer perceptions of quality, customer loyalty, brand association,
awareness, and image (Yoo et al., 2000). Research suggests that investments in marketing
activity can enhance or maintain customer-based brand equity, but there has been limited
exploration of the differences between traditional and non-traditional electronic commerce
business models (Keller, 1993). Studies on the effects of marketing mix decisions on brand
equity have included elements such as advertising expenditures, sales force and marketing
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research expenditures, age of the brand, advertising share, order of entry, and product portfolio
(Simon & Sullivan, 1993; Yoo et al., 2000). Other critical marketing activities include public
relations (Aaker, 1991), warranties, (Boulding & Kirmani, 1993), slogans or jingles, symbols,
and packages (Aaker, 1991), company image, country of origin, and promotional events (Keller,
1993).
Cobb-Walgren et al. (1995) empirically concluded that brands with greater advertising
budgets yield higher levels of brand equity, which in turn, generate greater consumer preference,
and purchase intent. Moreover, Sharma and Kesner (1996) found that high advertising
expenditures enable new entrants to become viable in the short run and build market positions.
They also found that seller concentration leads to higher sales growth. Yoo et al. (2000)
analyzed customer perceptions of marketing mix elements such as price, store image, distribution
intensity, advertising expenditures, and price promotions, concluding that all except frequent
price promotion are brand-building activities. Combining higher price levels with more
advanced product features positively affects brand equity. Moreover, store image along with
word of mouth and promotional activities enhance brand equity. Thus, pure play firms may face
a severe disadvantage relative to brick and click firms when trying to establish brand image. As
such, we offer the following research question:
RQ2: Do differences exist between brick and clicks and pure plays regarding experience
and the effectiveness of marketing activities related to brand equity development?
3.3 Channel Structure, Marketing Expenditures, and Performance
Industry structure characteristics have also been useful in developing and explaining
performance models (Green, Barclays, & Ryans, 1995). In the context of industry channel
designs, marketing channel decisions have been categorized as direct and indirect marketing
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approaches (Lilien, 1979; Yoo et al., 2000; Kiang et al., 2000). Lilien (1979) found that firms
usually sell new products directly and sell mature products through distributors. Firms with high
product information needs, high customization requirements, high need for product quality, high
lot size requirements, broad assortment needs, low product availability needs, low after-sales
service requirements, and complex logistic needs, generally seek direct marketing approaches
(Rangan et al., 1992). However, this dichotomization is inadequate to address hybrid
distribution channel designs appropriate for electronic commerce.
Product characteristics, categorized as search or experience goods, have also been used to
explain consumer electronic marketing performance (Kiang et al., 2000). Search goods can be
evaluated using external information and are more suitable to being marketed on the Internet.
Experience goods have to be personally evaluated, and are less suitable for Internet marketing
(Kiang et al, 2000). A major obstacle for a new entrant in an experience goods market is
convincing consumers to take a chance on a new product when they are aware of the quality of
the incumbent firm’s brand because of prior use (Bharadwaj et al, 1993). Additional marketing
efforts to overcome consumer risk perceptions, can lead to significant differences in marketing
costs between new entrants and incumbents. Also products that are informational or intangible,
particularly if it can be digitized, are more adaptable to the online retail model (Kiang et al.,
2000).
Offering another classification scheme, Peterson, Balasubramanian, and Bronnenberg
(1997) divided marketing activities into three, somewhat overlapping channel typologies:
distribution, transaction, and communication. Distribution channels facilitate the physical
exchange of products and services. Transaction channels enable sales activities between buyers
and sellers. Communication channels generate exchanges of information between buyers and
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sellers. Zettelmeyer (2000) claims that firms can increase their market power by strategically
using information on multiple channels to achieve finer consumer segmentation. For certain
goods (e.g. online ticketing, digital products, and financial services) the Internet serves as both a
transaction and physical distribution medium. Cobb-Walgren et al. (1995) proposed that the
effects of advertising on brand equity were dependent upon channel type, such that greater brand
equity results in better market performance.
Models developed to predict performance outcomes have consistently included measures
of strategy and structure. The previous research reviewed has supported the importance of
channel structure in predicting performance in new and existing e-commerce entities. For this
performance model, we focus on three activities relative to brand equity development and
distribution channels that have received support in prior research: promotional expenditures
(Simon & Sullivan, 1993; Cobb-Walgren et al., 1995; Yoo et al., 2000), channel distribution
intensity (Yoo et al., 2000), and channel structure typology (Peterson, et al., 1997). We seek to
determine the impact of these variables on performance for two models of Internet e-commerce
(brick and click and pure play). Thus, the following research question is provided:
RQ3: Is performance for e-commerce firms (brick and click or pure play) influenced by
promotional expenditures, channel intensity, and channel structure?
4. Methodology
4.1 Data Collection
Using a database of firms doing business on the Internet, survey data were gathered using
a key informant technique (Poppo & Zenger, 1998) from the chief information officer or the
manager of information technology by Activmedia, an Internet research firm. Specifically, a
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population was extracted from a global directory of 550,000 publicly listed URLs. Once
unduplicated, an nth name random sample was drawn from English-language directory systems,
which accounts for 80% of Web URLs overall. The instrument was a multi-part web-based
survey, with appropriate skips and branches. An e-mail invitation was sent to 4,604 businesses
in the year 2000, giving them 48 hours to respond and promising a copy of the final report. In
that period 1013 respondents provided usable data, representing a response rate of 22%. Of the
total firms in the database the sample was further segmented to include only firms doing
business-to-consumer (B2C) marketing, resulting in a sample size of 240 (133 brick and clicks
and 107 pure plays). Firm size in this study averaged 16 employees; traditional firms averaged
19 and pure plays averaged 9. Firms in this study can be further classified as entrepreneurial,
since the length of time they have used Internet electronic commerce as a new venture or
innovative transaction mechanism ranged from 1 to 7 years (Bamford, Dean, & McDougall,
1999). Geographically, 78.4% were from North America, 7.6% were from Europe, and 7.2%
were from South America and Asia.
4.2 Measurement Variables
Business Model. The two business models (MODEL) were dichotomized based on
whether respondents indicated their firm sold through any channels other than the Internet prior
to going online. Pure plays were coded “1” and brick and clicks were coded “0”.
Performance. Rather than using corporate level measures that may not be appropriate for
measuring functional strategies (Nickell, 1996; Geroski, 1998; Stuart, 2000) this paper uses key
informant perceptions of performance at the functional level: web-generated productivity and
web site profitability. Although objectives measures are more popular, Venkatraman and
Ramanujam (1987) found a high degree of correlation between perceptual and objective
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performance measures and concluded that perceptual measures are acceptable
operationalizations of business economic performance. Since most businesses are not required
to report accounting data at the functional level, profit expectations (PROFIT) were used as a
proxy for financial performance. Accordingly, respondents were asked to rate their web-based
profit expectations for the current fiscal year as follows: profitable now = 5; profitable in 12
months = 4; profitable in 12-24 months = 3; profit in 2-5 years = 2; may never be profitable =1.
This research also uses electronic commerce sales growth as a productivity-based measurement
of firm performance (Sharma & Kesner, 1996; Stuart, 2000). Key informants were asked their
perception of the total web-based revenue growth (REVGRO) during the current year (converted
to US dollars) and the percentage of international web-based revenue growth (GLOBALREV).
Brand Equity Strategies. To examine the research questions it was also necessary to
collect key informants’ perceptions of advertising and promotion strategies specific to brand
building. Respondents were asked to rate the overall success of advertising and promotion
strategies and specifically advertising for brand name recognition (very successful=1, not
successful=4). The efficacies of several marketing activities associated with brand equity were
also used in this study. Respondents were asked to rate their experience with the following
online website promotion methods on a 5 point Likert-like scale (1= excellent, 5 = poor): 1)
overall online site promotion; 2) paid banner ads; 3) buttons and links; 4) paid sponsorships; 5)
online press releases; 6) affiliate programs; 7) reciprocal ads and links; and 8) search engines. In
addition respondents were asked to rate their experience with the following offline website
promotion methods: 1) overall offline site promotion; 2) paid print; 3) paid broadcast ads; 4)
direct mail and catalogs; 5) sweepstakes and contests; 6) trade shows; and 7) brochures.
Distribution Channel Measures. This study measures two aspects of distribution channel—
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intensity and structure. Distribution channel intensity (CHANINTEN) has been operationalized
as the number of firm stores in operation (Peterson et al., 1997). This study uses a similar
measure more suitable to electronic commerce, expressed as the number of online products and
services sold. Channel structures utilized were measured by asking respondents the purpose of
their website. Respondents indicated which channel type applied (yes=1, no=0) to their
marketing activity as follows: 1) accept orders (CHANSALE); 2) publish information
(CHANINFO); and 3) distribute products (CHANDIST) electronically via the Internet (Peterson
et al., 1997).
Marketing Expenditures. As indicated previously, advertising and promotion
expenditures play a significant role in the development of brand equity and subsequently
performance outcomes (Geyskens et al., 2002). This model measures marketing expenditure
(PROMOBUD) using a self-reported measure of on-line promotion budget. Respondents were
asked how much should be invested (converted to U.S. dollars) to promote an online business
similar to theirs.
4.4 Data Analysis
Descriptive statistics and a correlation analysis were performed. To examine research
questions one and two, t-tests were used to compare strategy and performance variables. To
examine research question three, regression analysis was used to determine whether promotion
expenditures, channel intensity, and channel structure variables predict performance of pure
plays and brick and click firms.
5.0 Results
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Table 1 presents the means and standard deviations, as well as the correlation coefficients
between variables. The results of the t-tests are reported in Table 2a and 2b. The results for
RQ1 are reported in Table 2a. As indicated, profit expectations are significantly higher for brick
and click firms (? = .45, p<.05). The mean score for percentage change in international
revenue is greater for pure plays (? = -9.88, p<.01). However, there is no significant difference
between business models for revenue growth.
The results for RQ2 are reported in Tables 2a and 2b. In terms of marketing strategy
efficacy, there are significant differences between the business models (Table 2a). Brick and
click firms are more effective with advertising/promotion strategies (? = -.29, p<.1) and with
advertising/brand recognition strategies (? = -.44, p<.05). With regard to marketing experience
(Table 2b), only one mean score for online site promotion methods, search engine, is
significantly higher for pure plays (? = .41, p< .01). However, mean scores for five of the
offline site promotion methods are significantly higher for brick and click firms as follows:
overall offline site promotion (? = -.81, p<.001); print media (? = -.68, p<.001); direct mail (? =
-.83, p<.001); trade shows (? = -.54, p<.05); and brochures (? = -.95, p<.001).
With regard to RQ3, the results of the regression analyses predicting financial
performance are presented in Table 3. The findings indicate that brick and click firms have
greater profit expectations as the business model variable (MODEL) negatively influences profit
expectations (p<.05). However, using the Internet to generate sales and accept orders
(CHANSALE), negatively influences profit expectations (p<.001). The use of the Internet for
product distribution also negatively impacts profit expectations (p<.05).
When examining current year revenue growth three independent variables were
significant. As might be expected, greater channel intensity (CHANINTEN) positively
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influences revenue growth (p<.001). The use of the Internet to publish information regarding the
product (CHANINFO) also has a positive impact on revenue growth (p < .05). Lastly, the size of
on-line promotion budgets (PROMOBUD) also positively impacts revenue growth (p<.01).
For the model with change in international revenue as the dependent variable, two
independent variables were significant. Using the Internet for distribution of products/service
(CHANDIST) is positive and significant (p < .05). Also, consistent with the t-test, the business
model variable (MODEL) suggests new ventures have higher growth rates in international
revenue (p<.01).
6.0 Discussion And Conclusions
The purpose of this paper is to compare and contrast two Internet electronic commerce
models—pure plays (new ventures) and brick and clicks (incumbents) to determine their relative
efficacy of marketing strategies and performance outcomes. This study also examines whether
channel structures and brand equity building strategies impact growth and profit expectations for
both pure plays and brick and click firms. In view of the proliferation of web-based business and
the recent rash of failures, it is important to understand how market entry models vary, as well
as, what organizational variables predict success.
As indicated previously, differences were expected between electronic commerce models
in marketing experience and the efficacy of marketing strategies related to building brand equity.
We found that, of the online promotion strategies considered, the only difference was that pure
play firms are more successful using search engines as a promotional tool. Brick and click firms
were clearly more successful in the use of traditional promotional tools such as print media,
direct mail, trade shows, and brochures. These results suggest that pure play firms are no more
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effective with the new online tools of promotion than brick and clicks, but distinctly less
successful using standard methods. Although not directly measured, it could be speculated that
they are less effective with traditional methods because they focus on electronic promotions but
not effectively enough to overcome the brand advantages of established firm.
The results also indicate that key informants from incumbent firms feel they are
marginally more successful using advertising and promotion strategies for building brand and
retaining customer base. Brick and click firms are also more successful in using advertising
primarily for brand name recognition. If the established relationship between building brand and
developing competitive advantage holds true for Internet firms, these results suggest that
incumbents will have better long-term performance than new ventures.
In terms of performance, one noteworthy result is that brick and click firms have higher
profit expectations than pure plays. Prior research maintains that brand equity creates added
value and a sustainable competitive advantage (Aaker, 1991; Bharadwaj et al., 1993), as well as
differentiates products, creates competitive barriers, and increases cash flow (Yoo et al., 2000).
Since our findings indicate incumbents have greater success in advertising and promotion
strategies for building brand recognition, it should follow that incumbents will have higher profit
expectations. In contrast, pure plays enjoy a greater international growth rate than brick and
click firms. Thus, international diversification may represent an opportunity as a successful
growth strategy for new ventures.
Another interesting finding of our study indicates that higher use of Internet commerce
for sales generation and product distribution has a negative impact on profit expectations. This
seemingly counter-intuitive result may be explained by transaction cost theory and consumer risk
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factors. On one hand, transaction cost theory suggests information technology reduces
transaction costs, particularly coordination costs (Clemmons, Reddi, & Row, 1993). More recent
evidence, however, indicates that performance losses result when firms coordinate information
systems activities in the market place (Poppo & Zenger, 1998). This negative finding may
therefore be a function of governance decisions related to the value chain activities associated
with sales transactions. Also, accepting or generating sales over the Internet may not be a
profitable activity for new ventures or established firms because of consumers’ reluctance to use
the Internet for sales transactions (Van den Poel & Leunis, 1999). In light of brick and click
firms having significantly higher profit expectations, established firms can likely withstand the
lack of profitability temporarily if they are successfully building brand equity. More
importantly, the absence of brand equity may explain why dot-com companies are failing.
Analyzing the effects of channel structure on market performance indicates that channel
intensity has significant and positive effects on revenue growth. In addition, utilizing the
Internet to publish information regarding products sold positively impacts revenue growth.
Thus, the more products sold over the Internet and the greater the information available
regarding those products, the greater the increase in revenue. An intense channel structure could
establish economies of scales, which reduce coordination costs according to transaction cost
theory. Therefore, low profit expectations may be, eventually offset by offering more products
or services over the Internet.
Consistent with the resource perspective (Li & Ye, 1999), the size of promotional
budgets positively impacts revenue growth. This finding is also consistent with Bharadwaj et al.
(1993) who suggested that sales productivity in Internet commerce may be a function of brand
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equity, which is impacted by promotional expenditures. Thus, firms with greater promotional
budgets experience greater increases in revenue.
The results also indicate that pure plays have a higher percentage increase in international
revenue. Moreover, international growth is positively affected by using the Internet for
distribution of products and services. These results suggest that pure plays that have products
that can be digitized or otherwise distributed electronically are more successful at growing in
global markets. This could be due to the relative ease of overcoming logistical problems of
exporting when your product can be electronically distributed.
Like most research efforts the current study must be interpreted in the context of some
limitations that provide opportunities for future research. Although other research has used
consumer perceptions of brand equity as a measurement (Yoo et al., 2000), the use of key
informant perceptions about performance measures is a limitation of this research. Actual data
regarding performance would always be preferred, although the availability of financial data for
web-based functional strategy implementation is questionable. Future research could advance
the literature more with quantifiable financial and market performance data that is customary in
business research such as return on investment and market share. Although this data may be
available at the corporate level for pure plays that have gone public, accounting guidelines do not
require reporting at the web site level. Future research could also assess whether the negative
results of using the Internet for sales could be a function of whether the product type is a search
or experience good which affects consumer risk and consumer reluctance (Van den Poel &
Leunis, 1999; Kiang et al., 2000).
22
Despite these limitations, this research provides useful insight into the differences
between the pure play and brick and click approaches to electronic commerce. Managers and
practitioners can use the findings to better focus their marketing strategies and channel
structures. Perhaps the usefulness of search engines is underestimated relative to other methods
of online promotion such as banner ads. Managers of pure plays may also find it useful to
concentrate some of their promotional efforts on traditional media, such as print, direct mail,
trade shows, and brochures.
Since managers of brick and click firms are still more successful in using advertising to
build on an existing advantage in brand recognition, the prospects for pure plays to overtake
brick and clicks may prove difficult. Also, if using the Internet to generating sales does not
increase revenue or profitability, pure plays will have difficulty building a sustainable
competitive advantage without a physical store and sales force.
In conclusion, these preliminary results provide some indications of why dot-coms using
the pure play model are failing. They may not have the strategic advantage or solid channel
structure to overtake the market performance of established firms, regardless of how much
money is invested from the financial sector. As incumbents expand their channel structure
electronically, their advantages of brand and marketing effectiveness may reduce any first mover
advantages achieved by pure play firms as new market entrants. Without strong market
performance, financial failure is not far away.
23
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Table 1. Descriptive Statistics and Pearson Correlation Matrix
Mean StD 1 2 3 4 5 6 7 8
1. PROMOBUD 1861691 3E+07
2. CHANINTEN 2987 22465 -0.01
3. MODEL .31 0.457 -0.03 0.11
4. CHANSALE 1.64 0.86 0.04 0.05 0.17 **
5. CHANINFO 0.37 0.67 -0.01 -0.04 0.09 0.17 **
6. CHANDIST 0.17 0.38 0.01 -0.04 0.12 0.04 0.14 **
7. REVGROW 363092 1E+06 0.01 0.64 ** 0.03 -0.09 -0.10 -0.10
8. GLOBALREV 11.59 28.82 -0.03 -0.03 0.17 * 0.17 ** 0.26 ** 0.26 -0.12
9. PROFIT 2.29 1.58 -0.05 -0.15 -0.07 0.26 ** 0.00 0.00 -0.31 ** 0.24 **
N=240; *p<.05; **p<.01; ***p<.001
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Table 2a: Bivariate Analysis: Means, (Standard deviations) and T-tests on Means Business Model Differences in Strategy and Performance
Variable Brick & Pure T-test
Click Play (2-tail)
Performance
Profit Expectations 2.43 1.98 1.948 *
(1.52) (1.25) Revenue Growth 336007.51 425765.78 -0.323 (1037379.1) (1414443.45) International Revenue % Change 8.89 18.78 -2.585 **
(23.99) (32.51) Advertising/promo strategy 2.55 2.84 -1.769 t
1.24 1.23 Advertising/brand recognition 3.05 3.49 -2.235 * 1.46 1.46 N=240; t p<.10; *p<.05; **p<.01; ***p<.001
29
Table 2b: Bivariate Analysis: Means, (Standard deviations) and T-tests on Means Business Model Differences in Strategy and Performance
Variable Brick & Click Pure Play T-test
(2-tail) Online Marketing Strategy
Online site promotion 3.26 3.10 0.872
(1.55) (1.55)
Banner ads 5.16 5.06 0.65
(1.32) (1.21)
Buttons and links 3.65 3.69 -0.199
(1.62) (1.48)
Online public relations 4.52 4.66 -0.633
(1.73) (1.64)
Affiliate 5.00 4.86 0.702
(1.55) (1.42)
Reciprocal ads 4.03 4.02 1.706
(1.66) (1.54)
Search engine 2.69 2.29 2.382 * (1.47) (1.32)
Offline Marketing Strategy
Offline site Promotion 3.16 3.97 -4.429 *** (1.30) (1.61) Print media 3.33 4.01 -3.504 *** (1.47) (1.64) Broadcast media 4.9 5.18 -1.311 (1.54) (1.54) Direct Mail 5.39 5.63 -3.758 *** (1.73) (1.59) Sweepstakes 5.39 5.63 -1.425 (1.23) (.981) Trade shows 4.24 4.78 -2.315 * (1.79) (1.68) Brochures 3.5 4.45 -4.67 *** (1.48) (1.73) N=240; *p<.05;**p<.01; ***p<.001
30
Table 3: Results of Regression Analysis Profit Revenue International Expectation Growth Revenue PROMOBUD -0.053 0.06 -0.045 CHANINTEN 0.161 * 0.650 *** -0.055 MODEL 0.024 -0.022 0.178 *
CHANSALE -0.372 *** -0.269 ** 0.140 CHANINFO -0.069 -0.039 -0.004 CHANDIST 0.121 -0.068 0.197 *
R2 0.169 0.491 0.353 Adjusted R2 0.125 0.427 0.125 F 3.824 ** 7.717 *** 2.303 * N=240; *p<.05; **p<.01; ***p<.001