Special Section: Information Systems in Competitive
Strategies: Offshoring, Risk Management,
Strategic Pricing, E-Sourcing, and Standards
Robert J. Kauffman, Eric K. Clemons, and Rajiv M. Dewan
Robert J. Kauffman is the Director of the MIS Research Center, and Professor and Chair in the Information Decision Sciences Department at the Carlson School of Management, University of Minnesota. He holds a B.A. from the University of Colorado, Boulder (1977), and an M.A. from Cornell University (1979). He is also an M.S. (1985) and Ph.D. (1988) graduate of the Graduate School of Industrial Administration (now the Tepper School of Business), Carnegie Mellon University, and served on the faculty of the Stern School of Business at New York University (1988–1994) and the Simon Graduate School of Business at University of Rochester (1993). His industry experience is in international banking and global finance, and financial services consulting. His research focuses on senior management issues in organizational strategy with technology, IT value, technology infrastructure investments and adoption, pricing strategies in e-commerce, and supply-chain management and electronic procurement markets. His research also won best paper awards over the years at the International Conference on Information Systems (ICIS), Workshop on Information Technology and Systems (WITS), and Americas Conference on Information Systems (AMCIS), and twice at the Hawaii International Conference on System Sciences (HICSS) and Institute for Operations Research and the Management Systems (INFORMS) Conference on Information Systems and Technology (CIST). His work with Sudipto Banerjee and Bin Wang on Bayesian analysis of Internet firm survival won top research honors at the International Conference on Electronic Commerce in Xi’an, China, in August 2005. He also chaired the Workshop on IS and Economics (WISE) at New York University (1991) and the Georgia Institute of Technology (1996), and INFORMS CIST in Denver, Colorado (2004).
Eric K. Clemons is a Professor of Operations and Information Management at the Wharton School of the University of Pennsylvania. He has an S.B. in Physics from MIT and an M.S. and Ph.D. in Operations Research from Cornell University. He has been a pioneer in the systematic study of the transformational effects of information on the strategy and practice of business. His research and teaching interests include strategic uses of information systems, information economics, and the effect of information technology on the risks and benefits of outsourcing and strategic alliances. Industries of focus include international securities markets and financial services firms, consumer packaged goods retailing, and travel. Dr. Clemons is the founder and Project Director for the Reginald H. Jones Center’s Sponsored Research Project on Information: Strategy and Economics, founder and area coordinator of the School’s new major in Information: Strategy, and Economics, director of the School’s new eCommerce major and member of the Wharton eBusiness Initiative Curriculum Oversight Committee, an active participant in the School’s eCommerce Forum research program, and member of the Faculty Council of the SEI Center for Advanced Studies in Management. Dr. Clemons has 28 years experience on the faculties of Wharton, Cornell, and Harvard, and consulting experience in the private and public sectors both domestically and abroad.
Rajiv M. Dewan is an Associate Professor of Computers and Information Systems at the William E. Simon Graduate School of Business Administration at the University of Rochester, where he teaches courses on financial information systems and the economics of information management and e-commerce. His research interests include management of information systems in organizations, markets for information goods and services, and the economics of electronic commerce. His research has appeared in Management Science, Journal of Management Information Systems, Communications of the ACM, IEEE Transactions on Computers, International Journal of Electronic Commerce, INFORMS Journal of Computing, and other journals. He has won best paper awards at the Hawaii International Conference on System Sciences (1998 and 2002), and at the International Conference on Information Systems (1995). He cochaired the Workshop on Information Systems and Economics (WISE) in Seattle, Washington, in December 2003.
Leading researchers in the field of information systems (IS) focus on the pursuit of new knowledge that will help us to understand the leading problems involving information technology (IT) with respect to decision making, products, business processes, firms, markets, and the global economy. This annual Special Section in the Journal of Management Information Systems, representing the recurring theme of “competitive strategy, economics, and IS,” has become a showcase for new thinking with respect to economic theory, analytical modeling, and econometric methods in IS research. This year—if we gauge by the contents of the Special Section—is no different. The topics that are discussed in the papers in this Special Section are worthy of the attention of senior management and faculty researchers. The authors who are represented offer a range of innovative and intriguing theoretical perspectives. They provide an opportunity for the readers of this journal to seek new ways of approaching a number of highly relevant problems. In addition, the evidence that the authors provide via their modeling and empirical results, and simulation and case study results, reveals many rich and new managerial insights that will be useful in the study of competitive strategy, economics, and IS.
The Special Section opens with a paper by Amitava Dutta and Rahul Roy, entitled “Offshore Outsourcing: A Dynamic Causal Model of Counteracting Forces.” The authors apply the methodologies and analysis constructs of systems dynamics as a means to examine the interaction among factors that have been driving the growth in offshore outsourcing. They argue that the recent upsurge in demand for offshoring services should be understood in the larger context of the international mobility of software labor and its changing local costs, and other elements of free markets and the global economy. Dutta and Roy also argue that IT is an important facilitator of offshoring. They develop a two-country causal model for IT offshoring that permits computational exploration of the key interacting variables and provides the capability to assess changes in offshoring services demand and supply as the underlying factor price of labor changes. The authors’ use of systems dynamics methods permits them to provide unique conceptual and evaluative representations of the changing parameters of the drivers of offshoring services demand and supply. The results of this research are developed through the authors’ use of computational experiments, which, in this context, involves the parameterizations of dynamic models that show the adjustment in factor wages associated with IT labor, while simultaneously considering the growth in the offshoring labor pool, the growth of training services to enhance the capabilities of labor, and the inflow of capital in support of the growth of the sector. The authors provide a unique contribution in their conceptualization of the interconnectedness of key drivers of offshoring in the global IS business context.
Ravi Aron, Eric K. Clemons, and Sashi Reddi next investigate the topic of “Just Right Outsourcing: Understanding and Managing Risk.” They identify the critical importance associated with a variety of kinds of strategic risk that affect the willingness of senior management to effectively develop outsourcing and offshoring contracts. The authors especially point to the role of the opportunistic behavior of suppliers of outsourcing services. They identify the critical importance of agency problems and shirking in outsourcing contracts, the poaching and misuse of contractually supplied information, and unilateral changes in the terms of a previously agreed-upon contract. The latter is alternately known as opportunistic renegotiation, post-contractual small-numbers bargaining, or simply vendor holdup. The authors offer a number of prescriptions to help senior managers redesign their business process outsourcing activities to mitigate the risks their firms will face. They also provide a framework with a series of analysis steps: the identification of the affected tasks, the means to assess the strategic and operational risks that are involved, and the redesign of business process outsourcing activities through a project management approach called strategic chunkification. This is “dividing any process into separate component activities, or chunks that can be outsourced, and that can be outsourced in a manner that reduces the risk relative to that of outsourcing the entire original process.” The authors further distinguish between vertical chunkification, which is dividing business process outsourcing into sequential nonoverlapping activities, and horizontal chunkification, which involves dividing the volume of a process or a set of subtasks among alternative vendors. They apply their conceptual approach in the context of a bank whose senior management wishes to outsource a mission-critical business process. Through detailed consideration of the various activities and risks that arise, the authors offer a number of potentially useful strategies for mitigating the strategic risks.
The middle three articles in the Special Section deal with strategic pricing in electronic commerce. They provide coverage of price rigidity and price flexibility in e-bookselling, pricing strategies for new and used bookselling in the presence of electronic secondary markets on the Internet, and the digital content distribution pricing for client–server and peer-to-peer (P2P) network distribution.
In “Beyond the Hype of Frictionless Markets: Evidence of Heterogeneity in Price Rigidity on the Internet,” Mark E. Bergen, Robert J. Kauffman, and Dongwon Lee present an empirical case study that investigates empirical regularities in daily pricing patterns and price rigidity for Internet-based selling by the two major online booksellers, Amazon.com and Barnes and Noble. Price rigidity occurs when retail and wholesale prices move less than might be expected, in view of the changing costs of the underlying commodities or input materials in manufacturing production, or when the level of interfirm competition suggests that heterogeneous firms might be able to effectively compete on price. The authors observed evidence of considerable daily price flexibility in the Internet-based sale of new books of various kinds, based on several million observations of book prices over a 449-day period in 2003 and 2004. They report, for example, that the leading e-booksellers appear to adjust prices flexibly on any day of the week. This is probably made possible by their reduced physical menu costs, or costs associated with price adjustment, which they face now that IT is at the heart of the production and dissemination of prices on the Internet. However, the authors also find contradictory evidence to suggest that there may be other drivers of price rigidity aside from menu costs. For example, they observed price changes for the e-booksellers with respect to specific books that occurred over a period of months—not days, as near-zero menu costs might suggest—and with substantial variations in price adjustment patterns across the two retailers and the different book categories. The authors propose a new variance theory of Internet-based price rigidity. They argue that the observed pricing patterns should be interpreted in terms of other theoretical considerations—such as characteristics of market demand, the nature of firm competition in the marketplace, the extent to which pricing choices convey information about the stores’ quality images, and so on. This research reflects the strong interdisciplinary nature of IS research on pricing that borrows ideas from marketing and economics.
Anindya Ghose, Rahul Telang, and Ramayya Krishnan, in “The Effect of Electronic Secondary Markets on the Supply Chain,” develop, analyze, and test a theoretical model of how electronic primary markets for new goods and electronic secondary markets for used goods interact with one another and affect sellers’ optimal strategies for price setting and channel choice. A commonly held perspective is that markets for used goods negatively affect the ability of sellers of new goods to achieve the highest levels of profitability. The authors offer counterintuitive thinking in this respect. They argue that there are conditions under which the development of a parallel electronic market has a positive influence on new goods sellers’ ability to increase sales. The authors call this the market expansion effect, and they report that it is a countervailing influence to the cannibalization effect that arises due to the competition between new and used goods purchases. A key insight of this research is that the use of a secondary market e-channel permits the seller to practice quality-based price discrimination without having to bear the typical costs associated with achieving effective market segmentation for quality. In addition, the authors explore the possibility that new goods prices are lower in the presence of an electronic market for used goods, and how used goods sales commission fees that are levied by a secondary electronic market intermediary affect pricing, and influence both the new and used goods markets. The authors analyzed data from Amazon.com, which sells new and used books of the same titles via its Web site. They show the tie between the used and new book markets online, in terms of the way that higher new book prices tend to drive used book prices higher, and that increasing availability of used books creates pressure to reduce new book prices.
Karl Reiner Lang and Roumen Vragov are the authors of the fifth paper of the Special Section. They continue the theme of pricing, technology in markets, and Internet-based selling. Their study, “A Pricing Mechanism for Digital Content Distribution Over Computer Networks,” reveals an interesting strategic choice problem that occurs with distributors of digital content on the Internet, such as digital music, DVD movies, electronic books, and other entertainment industry-related products. In particular, the authors analyze two different strategic approaches that digital content providers can use to distribute their information goods: a client–server model and a P2P model. The client–server model involves the management and distribution of information from a central location, in which digital content and customer relationships are tightly controlled. The P2P model of content distribution involves much less control over the supply of digital content and over the distribution channels that are used. Digital content consumers participate directly in the distribution process. However, the beneficial trade-off comes with improved efficiency of distribution and service level capabilities that need not be matched by central infrastructure capacity. The authors develop a monopolistic pricing mechanism that compensates P2P users who play an active role in content distribution. They show the benefits and incentives associated with P2P network distribution over client–server distribution by analyzing a modified growth theory model that is developed with application to generations of consumers and which provides a means to share revenues with peer user/distributors of digital content.
The fifth paper of the Special Section asks an important question related to supply chain management: “Buyer’s Efficient E-Sourcing Structure: Centralize or Decentralize?” The authors, Rui Dai, Sridhar Narasimhan, and D.J. Wu, define e-sourcing as the use of business software to automate or augment key business processes related to procurement of supplies, including the identification and evaluation of procurement goods, the negotiation of the terms and conditions associated with purchasing, and the configuration of firm’s organizational structure for procurement, in view of the effective management of long-term supplier relationships. The authors develop and analyze an economic model that analyzes three critical success factors for e-sourcing. They include the communication complexity among interorganizational procurement partners, the frequency of use of the technology-based solution for procurement, and the unit cost of delay for the supply chain in the presence of the technology-based solution. The authors present modeling results for different levels of communication complexity, which emphasize different optimal choices for e-sourcing structure. For example, when communication complexity is high, the unambiguously appropriate choice for the firm is to decentralize procurement. When the opposite is true, and communication complexity is low, the firm should centralize e-sourcing. It turns out that in the intermediate cases—when communication complexity is medium high or lower—frequency of use is the controlling factor. With higher frequency of use, according to the authors, the appropriate decision is to tend toward greater decentralization of e-sourcing activities. The authors offer several mini-case analyses with numerical simulations of the effects of the different e-sourcing structures for firms that exhibit different communication complexity and frequency-of-use levels. They also extend the managerial intuition offered in their analysis by examining situations involving demand shocks and spikes, and servicing trade-offs in the presence of spillover of procurement requests across decentralized e-sourcing units of the firm. This kind of research is outstanding in terms of helping to structure senior managers’ thinking about the organization and governance of supply-chain and procurement activities.
The final paper in the Special Section is “Information Technology Standards Choices and Industry Structure Outcomes: The Case of the U.S. Home Mortgage Industry,” by Rolf T. Wigand, Charles W. Steinfield, and M. Lynne Markus. The authors offer a careful examination of the mortgage industry in the United States and the extent to which new IS standards are driving industry transformation. The authors discuss the role of XML-based standards in general terms across a variety of industries. They also make the case for vertical IS standards, which consist of data structures and data definitions, document formats, and business processes-related technical standards that apply in specific industry contexts. The authors argue that the changes in costs and accessibility associated with XML-based standards are likely to lead to significant changes in the mortgage industry. They also note, however, that the specific outcomes that are likely to be observed in the market are contingent upon the industry’s main players’ strategies and their success with implementation, in terms of operating-cost reductions and productivity improvements. The authors’ theory-building research offers a highly revealing “insider’s view” of the mortgage industry based on a longitudinal field study, case study interviews, and extensive analysis of prior literature. They leverage their main results to predict that the mortgage industry is unlikely to experience consolidation for primarily technology-driven reasons. Instead, they forecast that the benefits of XML-based standards will be available to be appropriated by a range of industry players, including small and medium-sized firms, which will also be able to successfully invest in them.
This is the second year that the Journal of Management Information Systems is publishing an expanded issue including papers devoted to new research on competitive strategy, economics, and information systems. The Guest Editors thank the Editor-in-Chief, Vladimir Zwass, who continues to make this opportunity available to us.
We would be remiss if we did not thank our faculty, industry, and doctoral program colleagues. The Hawaii International Conference on System Sciences (HICSS) and JMIS reviewers were enormously helpful with content-related suggestions that helped influence our authors’ thinking. These people were kind enough to assist us with up to three rounds of reviews on the Special Sections’ papers, resulting in their high quality. Finally, we thank Dongwon Lee and Donna Sarppo at the MIS Research Center, University of Minnesota, for helping out with disseminating review requests, reminding reviewers about the due dates of their reviews, and generally keeping this entire enterprise on track. We simply would not have been able to finish this Special Section without their outstanding assistance.