AN EMPIRICAL STUDY OF THE E-COMMERCE CLICK-AND-MORTAR BUSINESS MODEL AND PERFORMANCE: AN INNOVATION APPROACH

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1 International Journal of Electronic Business Management, Vol. 2, No. 2, pp (2004) 85 AN EMPIRICAL STUDY OF THE E-COMMERCE CLICK-AND-MORTAR BUSINESS MODEL AND PERFORMANCE: AN INNOVATION APPROACH Juin-Cherng Lu * Department of Information Management Ming Chuan University Taoyuan (320), Taiwan ABSTRACT After the tide of the Internet and impact of the Internet bubbled, E-Commerce business models have moved toward the click-and-mortar business models which could improve the revenue for keeping survival. This study is to explore the relationship between the click-and-mortar model and its performance based on the innovation approach. From the innovation perspective, three dimensions of the click-and-mortar, innovative service, channel integration and new market opportunity, are proposed; and its performance, including customer lock-in and new customer attraction, are measured. There are 95 samples are selected from the list of Trusted E-Commerce Stores in Taiwan, and 31 valid samples for analysis. The results show that click-and-mortar business models indeed generate benefits for the E-Commerce business, but channel conflict will affect the difficulties of adoption of the click-and-mortar and generates the negative effects to its performance. The click and-mortar provides the convenient way for transaction online and solves the problem of payment and distribution offline, reciprocally. Besides, innovative service such as customization or personalization has more precise targeting to the customers with adding value of information. As to the price conflict on channel, the click-and-mortar business model could provide solution of bundling gifts, product differentiation, dynamic pricing strategy, or better service to the customers. Suggestions for the further research are proposed finally. Keywords: E-Commerce, Click-and-Mortar, Business Model, Business Innovation, Channel Conflict * 1. INTRODUCTION The advancement of Internet technology and E-Commerce causes a new wave; however, no clear revenue model and neglect the importance of physical channel and logistic are the main reasons of Dot.com failure. The mortar (physical store) has advantage in service and distribution by owning access channel; on the other hand, the click (virtual store) has advantage in applying innovative Internet technology without any cost burden of physical channel and store. But today, the click faces the severe problems of logistic and product distribution in the operations of E-Commerce. Gulati and Garino [4] suggested that firms could adopt the integration of the mortar and the click, that is the click-and-mortar business models, to complement each other for success in the E-Commerce. * Corresponding author: jclu@mcu.edu.tw According to the investigation by the III (Institute of Information Industry, Taiwan) in 2002, the E-Commerce business models classification could be depicted as Table 1 shown. The investigation also found that 27% B2C business models had been profitable at all; however, 77% B2C firms predicted to be profitable within the next 2 years. It is apparently on the trend that E-Commerce will be toward the click-and-mortar business models. Theoretically, firms would construct a good-fit-mix strategy of marketplace and cyberspace in fully considering to gaining advantage. But, there is little empirical evidence to demonstrate the relationship between the new click-and-mortar business model and its performance. In addition, E-Commerce can be regarded as innovation, importing new paradigm or new Internet platform for doing business in the Internet world, such that the click-and-mortar business model is also an innovative business concept. Therefore, this study is to explore

2 86 International Journal of Electronic Business Management, Vol. 2, No. 2 (2004) the empirical relationship between the new click-and-mortar model and its performance based on the innovation approach. Table 1: e-commerce business models, Taiwan Business models classification % Mortar first, and then click adoption 67 % afterwards Pure Click integrating mortar 15% dot.com No mortar integration 18% Source: III, Taiwan [5] This paper is organized as follows. The first section introduces research problem and objective for the study. The second section is literature review, and the third section is of research framework and method for conducting the empirical investigation. The fourth section is data analysis and hypotheses testing; the conclusion and suggestion are provided finally. activity [14]. It also describes the various business stakeholders and the potential benefits to each others; or describes the revenue flows that sustain the model [16]. In short, it is about how the firm makes money. In the era of Network Economy, firms should rethink how to create new product/service for customers the more value by integrating the physical and virtual value chain to construct a workable business model [10]. Willcocks and Plant [17] also argue that any successful company should base its core competency on technology, brand, service and market, which the basic 4 strategies for the reference resource of the click-and-mortar business models. Due to the complementary assets and synergy seeking for both online and offline businesses, Gulati and Garino [4] proposed a spectrum of integration of the click-and-mortar business model for firm, as shown in Figure 1, to thinking about its strategy for gaining business revenue. 2. LITERATURE SURVEY 2.1 The Definition of Innovation: Innovation is an important concept in the modern economy and also a driving force to product and process novelty in competition. Schumpeter [12] defined the innovation as an entrepreneur implements a new combination of production factors; and the meanings of innovation include 5 elements: (a) the introduction of a new product or a qualitative change to an existing product; (b) the introduction of a process new to an industry; (c) the opening of a new market; (d) the development of new sources of supply for raw materials or other inputs; and (e) changes in industrial organization. Following this way, economist Knight [7] classified the innovation concept into 4 categories: (a) innovation in product or service; (b) innovation in production process; (c) innovation in industrial organizations; and (d) innovation in people. Rogers [11] also defined innovation as a new concept, technique, advice, idea or entity for the people or organization to adapt. Business innovation, including product and/or process innovation, could bring about competitive advantage for itself, and reform industry structure eventually. Technology innovation, especially, is very important for firm to transform the process, product or service into new ones or combinations. Hence, business model innovation can be seen as new model for business transaction and revenue generation, evermore, creation of new marketplace. 2.2 Click-and-Mortar Business Models Business model is a new concept and term applied to the E-commerce. The business model can be defined as an architecture for the product, service and information flows surrounding a value-creating Figure 1: A spectrum of click-and-mortar source [4] 2.3 Channel Integration Kotler and Armstrong [8] argues that a channel is an aggregation of related and inter-dependent agents to foster products or services consumed by the customers. Channel is an organized web or network. Yvette [18] suggests that the integration of multi-channel is combining traditional store, mail-order and online environment due to the channel integration providing customers with quality, timely and cost effective service. Bernadette [2] argues that firms could implement multi-channel strategy to develop or raise integration efficiency no matter online or offline via integrated and collaborative web sites or stores to contact customers directly and to enhance the efficiency of other channels. Channel integration is popular in the commerce, however, it also breeds channel conflicts among agents owning to the stress or tension of channel objectives and/or performance [3]. In summary, the New Economy brings about new opportunities for business, and also new business model for firms to think about the challenge. In this paper, an innovation approach is applied to study the relationship between click-and-mortar E-commerce and its performance.

3 J. C. Lu: An Empirical Study of the E-Commerce Click-and-Mortar Business Model and Performance RESEARCH FRAMEWORK AND METHOD In this paper, the research framework, as shown in Figure 2, is proposed according to the research problems and literature review, and implies that the independent construct is the click-and-mortar business model, the dependent construct is its performance, and the moderating construct is channel conflict. 3.1 The Click-and-Mortar Business Model The click-and-mortar construct is investigated into 3 variables by the innovation approach: (a) innovative service: By using the Internet technology and resource to support the customer is identified as new or innovative service which can be produced along and be attached on the real product. Innovative service could be operationalized into innovative process of transaction, online personalization and quick response. (b) channel integration: The channel activity is via a group of organization, which connects to each other transforming the product or service from the producer to consumer [8,15]. The click-and-mortar combines physical and virtual channel as channel integration to provide the customers new choices of consuming, for example, process visibility of transaction, quick delivery and online information providing. (c) new market opportunity: As to the creation of new market opportunity by the click-and-mortar, customers or transactions can be touched or happened through many ways of convenience and interaction in the Internet. New market opportunity includes multifaced contact, new brand and technological service. 3.2 Performance of Click-and-Mortar Business Model The performance of E-Commerce could be measured by keeping customer, attracting new customer, increasing revenue and market share [1,17,18]. The innovation approach to the performance of the click-and-mortar can be measured by (a) customer lock-in: the click-and-mortar could provide the online and quick feedback, multi-channel convenience, customized product/service and user-friendly interface for customer retention and lock-in, and (b) new customer attraction: the click-and-mortar model not only changes the transaction process but also creates new methods of value-added activities to connecting new customers, especially for the N-generation, in the era of E-Commerce. 3.3 Channel Conflict There exists potential channel conflict among the physical and virtual channels when the click-and-mortar is adopted, and evermore it will affect the success and revenue flow of the click-and-mortar, or the transformation of business model itself [16,17,18]. The channel conflict could happen on pricing, marketing, product return, and goals setting in behalf of profit-seeking between the click and mortar. Channel conflict The click-and-mortar: Innovative service Channel integration New market opportunity The performance: Customer lock-in New customer attraction Figure 2: The research framework 3.4 Research Hypothesis Based on the research framework, the research hypotheses are formulated as H1, H2 and H3; and each described as followings: H1: The click-and-mortar has a positive relationship with its performance. H1 could be divided into six sub-hypotheses: (H1-1) The innovation service of the click-and-mortar has positive effect to customer lock-in; (H1-2) The innovation service of the click-and-mortar has positive effect to new customer attraction; (H1-3) The channel integration of the click-and-mortar has positive effect to customer lock-in; (H1-4) The channel integration of the click-and-mortar has positive effect to new customer attraction; (H1-5) The new market opportunity of the click-and-mortar has positive effect to customer lock-in; (H1-6) The new market opportunity of the click-and-mortar has positive effect to new customer H2: Channel conflict has a negative effect to the

4 88 International Journal of Electronic Business Management, Vol. 2, No. 2 (2004) performance of the click-and-mortar. H2 could be divided into two sub-hypotheses: (H2-1) In the click-and-mortar, channel conflict has a negative effect to customer lock-in; (H2-2) In the click-and-mortar, channel conflict has a negative effect to new customer H3: The click-and-mortar with the moderating effect of channel conflict on its performance is significant. H3 could be divided into six sub-hypotheses: (H3-1) The innovative service of click-and-mortar with the effect of channel conflict on customer lock-in. (H3-2) The innovative service of click-and-mortar with the effect of channel conflict on new customer (H3-3) The channel integration of click-and-mortar with the effect of channel conflict on customer lock-in. (H3-4) The channel integration of click-and-mortar with the effect of channel conflict on new customer (H3-5) The new market opportunity of click-and-mortar with the effect of channel conflict on customer lock-in. (H3-6) The new market opportunity of click-and-mortar with the effect of channel conflict on new customer 3.5 Research Design and Method There are 95 samples are selected from the list of Taiwan s 2002 Trusted E-Commerce Stores, provided by the Ministry of Economic Affair, Taiwan, and mailed the questionnaires to them by direct contacts, but the return rate is 32%, only 31 valid samples for this analysis. Samples cover 7 categories as Table 2 shown, including Book, CD, Computer Peripheral, Food, Gift, Grocery and Flower. The software package SPSS 11 is applied to data analysis and methods for hypotheses testing includes the Frequency Distribution, the Pearson Correlation, ANCOVA and Regression Analysis. Finally, the Path Analysis is applied to depict the effects among the variables of research framework. Table 2: Samples categories Category item Sample no. Percent Book % Peripherals % Food % Gift % Grocery % Flower % CD % 4. DATA ANALYSIS AND HYPOTHESIS TESTING Reliability analysis was conducted and items with low corrections were deleted. Cronbach s were computed, and all scales exceeded Nunnally s [9] reliability guidelines of 0.7 or above, as Table 3 shown. Table 3: Reliability analysis Cronbach s value Click-and-mortar Model Innovative service Channel integration New market opportunity Performance Customer lock-in New customer attraction Channel Conflict Total reliability It is proved that the click-and-mortar business model and its performance exists correlation significantly after the Pearson analysis. By using the Regression Analysis, the hypothesis 1-3, 1-4, 1-4 are accepted and hypothesis 1-1, 1-2, 1-6 are rejected by the criteria of R2 value over 0.3, as Table 4 shown. By using the Pearson Correlation Analysis to test H2, the performance of click-and-mortar has negative with channel conflict in general; but the effect of customer lock-in is higher than that of new customer attraction, as Table 5 shown. Table 4: The regression analysis (for the research framework) Click-and-mortar Performance F-Value P-Value R 2 Innovative service Customer lock-in 9.611** Innovative service New customer attraction 4.196* Channel integration Customer lock-in ** Channel integration New customer attraction ** New market opportunity Customer lock-in ** New Market opportunity New customer attraction 5.981* * Correlation is significant at the = 0.05 level (2-tailed) ** Correlation is most significant at the = 0.01 level (2-tailed)

5 J. C. Lu: An Empirical Study of the E-Commerce Click-and-Mortar Business Model and Performance 89 Table 5: The Pearson correlation analysis (for H2) Customer lock-in New customer attraction Performance Pearson correlation * * ** Channel conflict P value * Correlation is significant at the 0.05 level (2-tailed) ** Correlation is most significant at the 0.01 level (2-tailed) Table 6: The ANOVA analysis (for H3) Click-and-mortar Performance F-value P-value Mean difference Innovative service Customer lock-in 7.636** ** Innovative service New customer attraction 8.28** ** Channel integration Customer lock-in 4.237* * Channel integration New customer attraction New market opportunity Customer lock-in 7.187* * New market opportunity New customer attraction 7.604** ** * Correlation is significant at the = 0.05 level ** Correlation is most significant at the = 0.01 level Figure 3: The path analysis of research framework By using the ANCOVA method to test H3, it is found that the channel conflict will affect the performance of click-and-mortar, as shown in Table 6. Except the hypothesis 3-4 is rejected, other hypotheses are all accepted. In order to understand the structure and effects among the click-and-mortar business mode and it performance, this study applies the Path Analysis to show the degree of relation in the research framework, as Figure 3 shown. Based on the data analysis, the results of hypotheses testing can be summarized in Table 7. The results, H1-1, H1-2, H1-6 and H3-4 are rejected and the others are accepted. The study shows that channel will affect the performance of click-and-mortar and the channel conflict of price and marketing is the most serious of all. As firms adopt the click-and-mortar models, they have to consider innovative services such as customization or personalization and multi-choice for customer retention, and new access to market opportunity or expand to connect potential customers. The results also show that the click-and-mortar has positive relationship with its performance partially, and partially with the moderating effect of channel conflict on performance.

6 90 International Journal of Electronic Business Management, Vol. 2, No. 2 (2004) Table 7: The results of hypotheses testing (for H1, H2, H3) Hypotheses H1, H2, H3 statements H1: The click-and-mortar has a positive relationship with its performance. Result (H1-1) The innovative service of the click-and-mortar has positive effect to customer lock-in. Rejected (H1-2) The innovative service of the click-and-mortar has positive effect to new customer attraction; Rejected (H1-3) The channel integration of the click-and-mortar has positive effect to customer lock-in; (H1-4) The channel integration of the click-and-mortar has positive effect to new customer attraction; (H1-5) The new market opportunity of the click-and-mortar has positive effect to customer lock-in; (H1-6) The new market opportunity of the click-and-mortar has positive effect to new customer Rejected H2: Channel conflict has a negative effect to the performance of the click-and-mortar. (H2-1) In the click-and-mortar, channel conflict has a negative effect to customer lock-in; (H2-2) In the click-and-mortar, channel conflict has a negative effect to new customer H3: The click-and-mortar with the moderating effect of channel conflict on its performance is significant. (H3-1) The innovative service of the click-and-mortar, with the moderating effect of channel conflict, causes customer lock-in significantly. (H3-2) The innovative service of the click-and-mortar, with the moderating effect of channel conflict, causes new customer attraction significantly. (H3-3) The channel integration of the click-and-mortar, with the moderating effect of channel conflict, causes customer lock-in significantly. (H3-4) The channel integration of the click-and-mortar, with the moderating effect of channel conflict, causes new customer attraction significantly. Rejected (H3-5) The new market opportunity of the click-and-mortar, with the moderating effect of channel conflict, causes customer lock-in significantly. (H3-6) The new market opportunity of the click-and-mortar, with the moderating effect of channel conflict, causes new customer attraction significantly. 5. CONCLUSION The click-and-mortar business model is an important trend for the new era of E-Commerce. From the innovation approach, this study concludes that a firm s capability and resource to provide innovative service, channel integration and new market opportunity will increase its performance of new customer attraction and customer lock-in. But the click-and-mortar also has to solve the dilemma of channel conflict such as pricing, marketing and price competition between online and offline channels. The click and-mortar, however, provides the convenient way for transaction online and solves the problem of payment and distribution offline, reciprocally. By the way, the innovative service such as customization or online personalization has more effects of precise targeting to the customers by adding online value and information value. The same findings as Steinfield, Bouwman and Adelaar [13] point out that the books and music retailers, for example, complemented online orders with in-store pick-up and payment, helping to overcome concerns about the security of transaction from the customers in E-Commerce. Most B2C firms adopt physical outlets to accept product-returns, a practice which favors customers reducing risk and building trust, respectively. This study suggests that the click-and-mortar is a working and profitable business model with channel complementing and integrating advantage for the online and offline context. Based on the innovation approach, the click-and-mortar business model indeed generates innovative service, new market opportunity and multi-channel convenience for customers; but needs to solve the channel conflict carefully. The empirical test reported here provides a first attempt to understand the click-and-mortar business model and the performance in Taiwan. As to E-Commerce, the click-and-mortar business model is of an emerging trend and being explored currently so that difficulties of samples and data collection are the limitations. REFERENCES 1. Amit, R. and Zott, C., 2001, Value creation in e-business, Strategic Management Journal, Vol. 22, pp Bernadette, T., 2002, The Hybrid Company: Reach All Your Customers Through Multi-Channels Anytime, Anywhere, Dearborn Financial Publishing. 3. Gaski, J. F., 1984, The theory of power and

7 J. C. Lu: An Empirical Study of the E-Commerce Click-and-Mortar Business Model and Performance 91 conflict in channels of distribution, Journal of Marketing, Vol. 48, pp Gulati, R. and Garino, J., 2000, Get the right mix of bricks and clicks, Harvard Business Review, Vol. 78, pp Institute of Information Industry, III, 2002, The Electronic Commerce Business Models in Taiwan: Survey, Taiwan. 6. Kalakota, R. and Robison, M., 2000, E-Business Roadmap for Success, Addison-Wesley. 7. Knight, K. E., 1967, A description model of the Inta-Firm innovation process, The Journal of Business, Vol. 40, pp Kotler, P. and Armstron, T., 2000, Marketing Management: A Managerial Perspective, Prentice-Hall, Inc. 9. Nunnally, J. C., 1978, Psychometric Theory, McGraw-Hill, New York. 10. Plant, R., 2002, E-Commerce: Formulation Strategy, Prentice-Hall, PTR. 11. Rogers, E. M., 1983, 1995, Diffusion of Innovation, New York. 12. Schumpeter. J. A., 1934, The Theory of Economic Development: An Inquiry into Profit, Capital, Credit, Interest and Business Cycle, Harvard University Press. 13. Steinfield, C., Bouwman, H. and Adelaar, T., 2002, The dynamics of click-and-mortar electronic commerce: opportunities and management strategies, International Journal of Electronic Commerce, Vol. 7, No. 1, pp Timmers, M., 1999, Business models for electronic markets, International Journal of Electronic Commerce, Vol. 3, No. 1, pp Turban, E., Lee, J., King, D. and Chung, H. M., 2002, Electronic Commerce: A Managerial Perspective, Prentice-Hall, Inc. 16. Weill, P. and Vitale, M. R., 2001, Place to Space: Migrating to E-Business Models, Harvard Business School Press. 17. Willcocks, L. P. and Plant, R., 2001, Pathways to e-business leadership: getting from bricks to click, MIT Sloan Management Review. 18. Yvette, M., 2002, Notes on multi-channel retailing, Ivey Management Services. ABOUT THE AUTHORS Juin-Cherng Lu received his Ph.D. degree in Strategy and Information Management from National Taiwan University (NTU) and is currently an associate professor of the Department of Information Management at Ming Chuan University. His research interests are Information management, E-Commerce and ebusiness Management, Customer Relationship Management, Knowledge Management. He has also participated in several research projects with high-tech companies in Taiwan. (Received July 2003, revised September 2003, accepted November 2003)