Investigating Search Costs and Coordination

SPECIAL SECTION ‘E-BUSINESS IMPACTS REVISITED’

AbstractInvestigating Search Costs and Coordination This paper examines how World Wide Web (WWW) usage for procurement purposes Costs in Electronic Markets: A Transaction affects corporate buyers’ search costs and buying organizations’ coordination costs Costs Economics Perspective and how it ultimately affects the efficient boundaries of buying organizations. The analysis is based on a model that integrates YOUNES BENSLIMANE, MICHEL PLAISENT AND PROSPER BERNARD Transaction Costs Economics (TCE) (Williamson 1975, 1985) and forces of electronic interconnections (Malone et al. 1987). Data collected from 110 corporate buyers from over 100 organizations doing business in a wide range of industries were used to test the validity of the proposed model. Findings show that WWW usage is associated with a reduction of buyers’ search costs, which can give buying organizations the flexibility to increase their base of suppliers when such an increase fits their interest. No clear relationship was found between WWW usage and the INTRODUCTION of vendors have set up commercial reduction of coordination costs buying websites to do business over the organizations face to integrate their value Electronic commerce (EC) has Internet. These commercial websites chain activities with those of their suppliers. received much attention from differ in terms of the functionalities Findings show however that a WWW-based Information Systems (IS) researchers they provide: The simpler ones are reduction in coordination costs can give and practitioners because it can informational and the more complex buying organizations the flexibility to out- improve the performance of indivi- ones are transactional (Lightner source certain activities when such a move dual users (Bakos 1997; Barua et al. 2004; Liu et al. 1997). Depending fits their interest. The TCE framework was 1997) and of organizations on their functionalities, commercial used to identify the transactions most likely (DeLone and McLean 1992, 2003; websites support, in whole or in affected by these changes in buying organi- Jones and Beatty 1998; part, electronic transactions. zations’ boundaries. Mukhopadhyay et al. 1995). From Transactional websites typically Keywords: e-markets, search costs, buyers’ perspective, EC is the use of include electronic catalogues, shop- coordination costs, transaction costs telecommunication networks for the ping carts, payment systems and identification of potential suppliers, order tracking systems that offer

Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010 the selection of business partners, buyers a convenient and cost-effec- and the execution of transactions tive way to support the procurement (Choudhury et al. 1998). A narrow process as they allow for the identi- Authorsdefinition of EC suggests that all fication and the selection of suppliers three activities be conducted online, and the execution of business trans- Younes Benslimane whereas a wider one, the one actions. Commercial websites can ([email protected]) is an Assistant Professor of Information Technology at adopted in this research, suggests support both electronic hierarchies York University, Toronto, Canada. His that at least one activity be sup- – by linking an organization to its research interests include the economics ported electronically (Reimers sole supplier of a given input – and of IS and E-commerce. 1996). Traditionally, EC has been electronic markets – by linking

2005 Electronic Markets Michel Plaisent supported by complex and expensive multiple vendors and buyers. ß ([email protected]) is a Professor interorganizational systems (IOS) Conducted from the perspective of of MIS at the University of Quebec in and as a result, only a small fraction corporate buyers and buying organi- Montreal, Canada. His research interests of business transactions has been zations and based on a model that include e-commerce and e-learning. Volume 15 (3): 213–224. www.electronicmarkets.org DOI: 10.1080/10196780500208756 Copyright conducted electronically (Barua and integrates forces of electronic inter- Prosper Bernard Lee 1997; Scala and McGrath ([email protected]) is a connections (Malone et al.1987) Professor of Strategic Management at 1993). and Transaction Cost Economics the University of Quebec in Montreal, In the 1990s, the World Wide (TCE) (Williamson 1975, 1985), this Canada. His research interests include Web (WWW) emerged as a new and study analyses the relationships strategic IS and e-commerce. valuable tool for EC and thousands between WWW usage for procurement 214 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets

and the productivity of corporate buyers and the hierarchies. Such a difference is due to the fact that efficient boundaries of buying organizations. markets benefit from specialization effect and economies of scale. Therefore, it is more cost-effective for an organization that does not specialize in the production LITERATURE REVIEW of a given input to get that input from a supplier that specializes in the production of such a component. The evolution of the Transaction Costs Economics However, using the market can be expensive because it framework makes the buying organization incur costs that would not apply if it had produced the given input itself. A first The Transaction Costs Economics (TCE) framework has component of the market-related costs is the search cost, been used predominantly to analyse the efficient which refers to the time and effort spent identifying boundaries of buying organizations (Bakos and potential suppliers and selecting a vendor (Bakos 1997; Kemerer 1992). It first originated in Institutional Ciborra 1993; Gurbaxani and Whang 1991; Malone et Economics (Coase 1937; Williamson 1975, 1985) and al. 1987). A second component is the coordination has later been extended and applied in the field of IS to costs, which are the costs an organization incurs in order analyse the consequences of IOS usage on firms’ to manage the flow of goods and services and synchro- governance structure (Bakos 1997; Bakos and nize its activities with those of its supplier (Ciborra 1993; Brynjolfsson 1997; Choudhury et al. 1998; Ciborra Clemons et al. 1993; Gurbaxani and Whang 1991; 1993; Gurbaxani and Whang 1991; Malone et al. 1987). Malone et al. 1987). The remaining component of such The original framework views the governance structure market-related costs are the contractual costs, which refer within a dichotomy between markets, which refer to the to the costs of writing, monitoring and enforcing a outsourcing of the activity, and hierarchies, which refer contract in order to protect a buying organization against to the internalization of an activity. The extended the risks of information asymmetries and of loss of framework introduces another dichotomist view of the bargaining power it may face when dealing with a governance structure for an outsourced activity. In this supplier (Ciborra 1993; Clemons et al. 1993; Gurbaxani new context, the governance structure is viewed within a and Whang 1991; Williamson 1985). Malone et al. dichotomy between markets, which refer to relying on a (1987) summarized the trade-off between markets and pool of suppliers for a given input and hierarchies, which hierarchies in terms of relative production costs and refer to exclusive relationships between an organization relative coordination costs arguing that relative produc- and its sole supplier for a given input. Both frameworks tion costs are higher in hierarchies and that relative are based on the assumptions of human opportunism coordination costs are higher in markets. and bounded rationality, and aim at describing the The extended framework has focused on transaction- preferred governance structure for an organization. related factors that help determine the optimal number With regards to the ‘make-or-buy’ decision, the of suppliers for a given input. Three important factors framework maintains that the choice for a given input have been discussed: they are complexity of product is based on a comparison of total costs of the alternative description, non-contractible investments and price options and that organizations tend to select the variability. Malone et al. (1987) have defined the Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010 governance structure that minimizes the total cost. complexity of product description as the amount of Two different views of such total cost can be found in information needed to specify characteristics of a given the literature, each one focusing on a particular aspect of input. A higher level of complexity of product descrip- the cost of using the market. The first one, in accordance tion increases the cost of searching the market prior to with Williamson (1975, 1985), considers the total cost each transaction, which makes hierarchy the preferred as the sum of the production cost and the contractual option. Drawing upon the theory of incomplete cost for producing or procuring the given input. The contracts, Bakos and Brynjolfsson (1997) have focused second one, pioneered by Malone et al. (1987) and on the investments in non-contractible resources a further refined by Gurbaxani and Whang (1991), sees transaction can require. Such non-contractible invest- the total cost as the sum of the production cost and the ments are by definition difficult to specify in a contract ‘operational’ cost for producing or procuring the given and therefore require a mechanism to protect the buyer. input. An organization that relies on the market for a For such transactions, hierarchy is the preferred coordi- given input tends to incur both operational and nation mechanism as it helps build long-term relation- contractual costs. Operational costs include search costs, ships that prevent suppliers from behaving transportation costs, inventory holding costs and com- opportunistically. Clemons et al. (1993) as well have munication costs whereas contractual costs are the costs discussed the protection that buyers benefit from when of writing, monitoring and enforcing the contract building exclusive relationships with their suppliers. related to a given transaction. Grossman and Hart (1986) and Hart and Moore Both views of the total cost suggest that production (1990) have suggested that vertical integration (i.e., cost for a given input tends to be lower in markets than in asset ownership) and the authority that it confers can Electronic Markets Vol. 15 No 3 215

help prevent opportunistic behaviour under incomplete upon these three effects, IS researchers have argued that contracting. Finally, Lacity and Willcocks (1995, 1998) more activities once internalized will be outsourced, have shown the limitations of outsourcing decisions that leading to a vertical disintegration of firms’ production were based on Transaction Costs Theory and have operations. Most of the IS research in this area has been presented selective outsourcing, experience and effective theoretical (Bakos and Brynjolfsson 1997; Clemons et contractual arrangements as better strategies for risk al. 1993; Clemons and Row 1992, 1993; Gurbaxani and mitigation. Finally, price variability in commodity Whang 1991). Very few studies have empirically tested markets has also been considered relevant to decisions the direct relationship between IOS usage and the move related to the number of suppliers for a given input to more outsourcing, and those who did, have relied on (Bakos 1991a, 1991b, 1997; Choudhury et al. 1998; secondary data from selected US industries: Kambil Rosenthal et al. 1993). Researchers have argued that a (1991) found a positive correlation between information higher level of price variability in commodity market technology (IT) investments and firms’ vertical disin- makes the market the preferred option. In commodity tegration whereas Brynjolfsson et al. (1994) found a markets, a given input tends to be identical across all positive correlation between IT investments and the vendors, which reduces both search costs and vulner- decline in firm size. Other scholars have investigated the ability to non-contractible investments. Moreover, price relationship between IT investments and coordination variability provides buyers with the incentive to alternate costs without referring to the move to more out- suppliers in order each time to get the needed input sourcing. Instead, they focused on the increased from the seller with the lowest cost. coordination requirements in contexts of vertical integration and of diversification and found that firms that expand their operations to other lines of business tend to The role of forces of electronic interconnections invest more in IT, providing support for the idea that IT can reduce coordination costs (Dewan et al. 1998; Hitt Malone et al. (1987) have been the first to link IOS 1999). Some case studies analysed the effect of IOS usage to firms’ efficient boundaries arguing that IOS usage on coordination costs and their results were have electronic communication, brokerage and integra- consistent with the theoretical work linking IT usage to tion effects that help a buying organization reduce some reduction in coordination costs (Clemons and Row of the costs it incurs when using the market: the 1993; Iacovou et al. 1995; Jones and Beatty 1998; Kraut electronic communication effect allows buyers to get et al. 1999; Mukhopadhyay et al. 1995). more and/or faster information from potential suppliers, As for the second move, researchers who have agreed hence reducing the costs of communicating with on the ‘firm disintegration’ hypothesis have referred to potential suppliers; the electronic brokerage effect allows two different yet complementary views of the activities buyers to consider a larger pool of potential suppliers, most likely involved in such disintegration. The first one which permits them to select better the supplier of a is known as the ‘move to the market’ hypothesis and was given input; the electronic integration effect allows pioneered by Malone et al. (1987). It suggests that buyers to reduce the uncertainty related to cross- technological change causes transactions to be less asset- organizational flow of activities, consequently insuring specific and to involve inputs that are easier to describe. Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010 a tighter coupling of activities across adjacent value This will lead organizations using electronic markets to chains. These effects can affect the governance structure broaden their base of suppliers for a given input because of organizations that have adopted such IOS. From this the electronic communication and brokerage effects of perspective, two basic moves have been considered: the such systems help reduce the search costs buyers incur. first one relates to the decision to outsource activities Such IOS make it easier for buyers to search for a better (Brynjolfsson et al. 1994; Ciborra 1993; Gurbaxani and deal each time they need to order an input. Bakos Whang 1991; Kambil 1991) and the second one relates (1991a, 1991b, 1997) has argued that this move to to the decision to increase the number of suppliers for a ‘more market’ is likely to prevail in electronic markets given input (Bakos 1991a, 1991b; Bakos and trading commodity products where price-based compe- Brynjolfsson 1997; Barua et al. 1997; Choudhury et tition is high. The second perspective proposed by al. 1998; Clemons et al. 1993; Malone et al. 1987). Clemons et al. (1993) and Bakos and Brynjolfsson Regarding the first move, researchers have argued that (1997), while taking into consideration the IOS-based forces of electronic interconnections can reduce specific reduction of search and coordination costs, insists on the components of the market-related costs, making out- necessity for firms to choose long term cooperative sourcing certain activities become more cost-effective. relationships with their suppliers in order to protect The electronic communication and brokerage effects of themselves against the risks of opportunistic behaviour. IOS can help reduce buyers’ search costs whereas the Based on Bakos and Brynjolfsson (1997), such option is electronic integration can help reduce the coordination likely to prevail in electronic markets trading non- costs a buying organization incurs in order to integrate commodity products that require more non-contractible its value chain with that of its trading partner. Drawing resources. Empirical evidence on this topic is very 216 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets

limited. Rosenthal et al. (1993) who investigated buyers’ WWW usage intentions in a hypothetical electronic market in the chemical industry found that the use of electronic The analysis of WWW usage for procurement purposes hierarchies would remain the preferred coordination should take into consideration the tasks and the types of mechanism. Choudhury et al. (1998) analysed the purchase corporate buyers execute. Basically, the pro- consequences of an electronic market in the aircraft curement process includes three activities: the identifica- parts industry but did not directly test the effect of the tion of potential suppliers, the selection of a business IOS usage on the size of the supply base of a given input. partner and the execution of the transaction They concluded however that by reducing buyers’ search (Choudhury et al. 1998; Novak and Simco 1991). The costs, IOS usage help lower prices and broker usage, WWW helps buyers identify a set of potential suppliers of which may provide some support for the move to ‘more a given input as thousands of vendors have set up their market’. Finally, using a Delphi analysis of possible websites in order to do business over the Internet consequences of Internet usage, Croom (2000) reported (Ghosh 1998; O’Connor and O’Keefe 1997; Poon and that Internet usage is likely to lead to outsourcing of Swatman 1999). Also, when pricing and other relevant maintenance, repair and operating (MRO) items to a information are made available on commercial websites, reduced number of suppliers. the WWW allows buyers to select a business partner for the pondered transaction (Bakos 1997; Barua et al. 1997). Finally, when vendors have set up transactional websites, buyers can execute their transactions online by RESEARCH MODEL AND HYPOTHESES placing orders, making payments and checking the status of their orders online. Based on supply chain manage- Because research on the TCE-based effects of IOS usage ment literature, straight re-buys (hereafter called routine is mostly theoretical, many researchers have stressed the purchases) must be distinguished from modified re-buy need for a rigorous operationalization of relevant or new buy (hereafter called non-routine purchases) as concepts and testing of hypothesis (Bakos 1991b, each type of purchase may require a different usage of 1997; Brynjolfsson et al. 1994; Clemons et al. 1993; the WWW. Typically, a routine purchase requires little or Clemons and Row 1992, 1993; Kraut et al. 1999; no additional information to be completed, whereas a Malone et al. 1987). The analysis of WWW usage for non-routine purchase involves some complexity and business-to-business (B2B) transactions, which are therefore requires that corporate buyers first search for estimated to represent about 80% of the value and the information about the input, about its price and about volume of all transactions conducted over the Internet potential suppliers (Novack and Simco 1991). (Perkins 2001; Rosen and Howard 2000), gives the opportunity to formally validate previous theoretical work. The objective of this research is to analyse TCE- Reduced search costs based effects of WWW usage on corporate buyers and buying firms. It attempts to validate possible relation- Search costs refer to the time and effort a buyer spends ships between electronic markets usage, search costs, to access the information needed to identify potential Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010 coordination costs and moves to ‘more outsourcing’ and suppliers of a given input and to select a vendor (Bakos to ‘more market’ for specific inputs. Figure 1 presents 1991a, 1991b, 1997; Barua et al. 1997; Choudhury et the model that summarizes the hypothesized relation- al. 1998; Ciborra 1993). The WWW has an electronic ships. Each variable and relationship is discussed below. communication effect and an electronic brokerage effect

Figure 1. Research model Electronic Markets Vol. 15 No 3 217

that allow buyers to get more and/or faster information researchers have argued that IOS help reduce the from potential suppliers and to better select a supplier external coordination costs, making it more efficient to respectively (Malone et al. 1987). externalize certain activities (Bakos and Brynjolfsson 1997; Brynjolfsson et al. 1994; Ciborra 1993; Clemons Hypothesis 1: WWW usage will be positively related to a et al. 1993; Gurbaxani and Whang 1991). TCE reduction of search costs. literature suggests that transactions occurring at a lower frequency and involving standard inputs are likely to be affected by such a move because (1) low-frequency Reduced coordination costs activities do not benefit from economies of scale and specialization effects and outsourcing them should be Coordination costs refer to the efforts deployed in order more cost-effective and (2) such activities involve to manage interdependencies among activities. standard inputs, which reduces the information, con- According to Clemons and Row (1993: 74), ‘problems tracting and monitoring costs buying firms would incur. in coordination stem from uncertainty due to insuffi- Suppliers’ transactional websites can help decrease cient information or information processing capacity … coordination costs, encouraging organizations to out- across firm boundaries.’ The coordination costs are the source some activities in order to benefit from a lower costs buying organizations face to reduce that uncer- total cost. tainty, leading to an integration of their value chain activities with those of their suppliers (Ciborra 1993; Hypothesis 4: Reduced coordination costs will be positively Clemons and Row 1993; Gurbaxani and Whang 1991; related to the move to ‘more outsourcing’ for low-frequency Malone et al. 1987). Transactional websites provide transactions involving standard inputs. additional information and processing capacity that can allow for a reduction of these coordination costs.

Hypothesis 2: WWW usage will be positively related to a METHODOLOGY reduction of coordination costs. Research design and source for data

More market A survey was used to collect data on the evolution of search costs and coordination costs in WWW-based The move to ‘more market’ refers to an increase in the electronic marketplaces. In Spring 2001, a questionnaire pool of suppliers for a given input following the was sent to each buyer member of the ‘Corporation des reduction in search costs associated with the electronic Approvisionneurs’ in the province of Quebec, Canada, communication and brokerage effects of the WWW. IS an organization affiliated to the Purchasing researchers have argued that, just because they are Management Association of Canada. Within six weeks, conducted in electronic marketplaces, some transactions of the 988 questionnaires sent, 110 usable ones were turn out to be executed among a larger number of completed and returned for a response rate of approxi-

Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010 suppliers (Bakos 1991a, 1991b, 1997; Bakos and mately 11.2%. The sample spanned corporate buyers Brynjolfsson 1997; Barua et al. 1997; Choudhury et al. from over 100 organizations doing business in a wide 1998; Malone et al. 1987). TCE literature suggests that range of industries. transactions occurring at a lower frequency and involving standard inputs are likely to be affected by such a move: for such transactions, buying firms using electronic Operationalization of constructs markets incur no switching costs and benefit from an increased competition among suppliers. Therefore, they Except for WWW usage, no pre-existing instruments tend to move to ‘more market’ as it becomes easier for could be located. Therefore, new scales based on their buyers to search the market for the ‘best’ deal each relevant literature were developed and tested for time they have to purchase the given inputs. reliability and validity. Following Churchill’s (1979) guidelines, multiple item-scales measuring the investi- Hypothesis 3: Reduced search costs will be positively related to gated constructs were developed. In accordance with the move to ‘more market’ for low-frequency transactions Nunnally (1988), seven-point Likert scales were used to involving standard inputs. ensure statistical variability among survey responses. The instrument was pilot-tested with five corporate buyers, More outsourcing one EC consultant and four IS researchers and their suggestions helped develop the final questionnaire. The The move to ‘more outsourcing’ can be a consequence section of questionnaire used for this research is of the electronic integration effect of the WWW. IS presented in Appendix A. 218 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets

The instrument developed by Massetti and Zmud 1998; Clemons et al. 1993; Malone et al. 1987) and to (1996) was adapted to measure WWW usage (USE) for identify the activities and inputs most likely to be both routine and non-routine purchases. Three items for affected by such moves. each type of purchase were used: they are the importance The reliability of the scale was assessed using the of the number of purchases, of the dollar amount of Cronbach alpha. No item deflated alpha, so all were purchases and of the percentage of suppliers dealt with kept. The range for all alphas varied from .82 to .95, using the WWW. The Reduced Search Costs (RSC) which indicates a high degree of consistency between the construct was measured in terms of increased informa- multiple items measuring each construct. The validity of tion obtained from alternate vendors, of ease of locating the scale was assessed using a factor analysis. The potential suppliers, and of improved selection process for principal components method with Varimax rotation the product or service to be bought (Bakos 1991a, was used to extract the five factors included in the 1991b, 1997; Barua et al. 1997; Choudhury et al. 1998; analysis. A factor loading greater than .50 with the Ciborra 1993; Malone et al. 1987). The Reduced theoretically correct sign was required for the assign- Coordination Costs (RCC) construct was measured in ment of an item to a factor. The results of the factor terms of reduced paperwork, reduced clerical errors, analysis confirmed the validity of the scale. The score for increased data transmission speed, reduced lead times, each retained factor equalled the mean score of its reduced inventory costs and reduced stockout problems retained items. Table 1 summarizes the results for the (Clemons and Row 1993; DeLone and McLean 1992, reliability and validity analyses. 2003; Iacovou et al. 1995; Jones and Beatty 1998; Reekers and Smithson 1996; Scala and McGrath 1993). DATA ANALYSIS Finally, two new three-item scales based on relevant TCE literature were developed to assess the move to Profile of respondents More Outsourcing (MO) (Gurbaxani and Whang 1991; Williamson 1975, 1985) and the move to More Market Table 2 presents the descriptive statistics for our sample. (MM) (Bakos and Brynjolfsson 1997; Choudhury et al. By job title, respondents were directors (26.9%), Table 1. Validity, reliability and descriptive statistics for constructs

Reduced search Reduced WWW usage costs coordination costs More outsourcing More market

Mean 2.59 5.32 3.30 2.35 4.22 St. Dev. 1.29 1.37 1.47 1.15 1.55 Alpha .91 .83 .92 .95 .83 RUSE1 .899 RUSE2 .868 RUSE3 .665 Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010 NRUSE1 .899 NRUSE2 .903 NRUSE3 .657 RSC1 .798 RSC2 .868 RSC3 .685 RCC1 .730 RCC2 .810 RCC3 .798 RCC4 .826 RCC5 .886 RCC6 .879 MO1 .898 MO2 .932 MO3 .901 MM1 .783 MM2 .835 MM3 .800

Rotated component matrix showing coefficients with values equal to or greater than .5 Electronic Markets Vol. 15 No 3 219

Table 2. Respondents’ profile managers (9.3%), senior buyers (30.6%) and buyers (33.2%). The most common age group of respondents Respondents’ profile Frequency (%) was 30–39 (37%), followed by 40–49 (34.3%), 50–59 (25%) and 20–29 (3.7%). The majority of the respon- Industry dents worked in the manufacturing sector (53.8%), Manufacturing 53.8 followed by those in the retail industry (38.7%) and Retail 38.7 those in the service sector (7.5%) and 31.8% of them Service 7.5 worked in organizations that used electronic data EDI usage interchange (EDI) systems to support their procurement Yes 31.8 process. In terms of annual volume of transactions, the No 68.2 respondents had purchased on average over $24 millions Hierarchy level worth of input. Results based the seven-point scale show Director 26.9 that corporate buyers use the WWW essentially to Manager 9.3 identify potential suppliers (5.7) or to select a supplier Senior Buyer 30.6 (4.1) and less to execute a transaction (2.5) and that on Buyer 33.2 average the level of WWW usage for procurement Early respondent purposes remains low (2.6). Yes 61.4 An additional screening assessed the non-response No 38.6 bias by comparing early respondents (i.e., those who had Age sent a completed questionnaire within the first three 20–29 3.4 weeks) to late respondents (i.e., those who had sent a 30–39 36.8 completed questionnaire after the third week) on the 40–49 32.2 50–59 27.6 basis of the constructs under study. The rational for this Annual volume of transactions ($) screening is that late respondents are likely to have Less than 5 millions 26.4 similar characteristics to non-respondents (Armstrong 5 millions - 10 millions 18.1 and Overton 1977). None of the five tests (a55%) 10 millions - 20 millions 19.4 indicated significant differences between the two groups, Over 20 millions 36.1 which suggests that there was no non-response bias. Task Supported by the WWW Finally, with regards to the relationships between (Average on a 7-point Likert scale) respondents’ profile and the constructs under study, Identification 5.7 the only significant difference was for the level of WWW Selection 4.1 usage among buyers in the retail industry (Mean52.98) Execution 2.5 and those in the manufacturing sector (Mean52.33). Table 3 summarizes the results of these tests. Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010

Table 3. Respondents’ profile and non-response tests

Effect on Constructs under Study

Profile factors WWW usage Reduced search costs Reduced coordination costs More outsourcing More market

Industry F5.3.495 F51.563 F5.394 F51.148 F5.233 Sig.5.034 Sig.5.214 Sig.5.675 Sig.5.321 Sig.5.792 EDI usage t5.825 t5.988 t5.604 t52.015 t5.791 Sig.5.441 Sig.5.342 Sig.5.551 Sig.5.988 Sig.5.431 Hierarchy level F5.824 F5.082 F51.000 F51.594 F51.631 Sig.5.442 Sig.5.922 Sig.5.371 Sig.5.208 Sig.5.077 Early respondent t5.628 t51.590 t51.466 t51.428 t51.300 Sig.5.534 Sig.5.114 Sig.5.197 Sig.5.560 Sig.5.218 Age F5.663 F5.657 F5.447 F5.087 F5.802 Sig.5.577 Sig.5.592 Sig.5.720 Sig.5.967 Sig.5.495 Volume of F5.595 F5.818 F5.582 F5.443 F5.362 transactions Sig.5.694 Sig.5.517 Sig.5.677 Sig.5.776 Sig.5.835 220 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets

Method of analysis rho was .346 (Sig.5.000) and the computed t value was 23.142 (Sig.5.003). Two statistical techniques were used to test the research hypotheses on WWW usage for procurement purposes. Hypothesis 2. Findings from the two tests show First, because all the variables under study were metric, the conflicting results. Whereas the Pearson correlation Pearson correlation was used to test the hypothesized (rho5.231 and Sig.5.015) shows that WWW usage is relationships. Second, WWW usage, reduced search costs significantly associated with a reduction in coordination and reduced coordination costs were later recoded into costs, the t test shows no support for the hypothesized variables distinguishing, for the first variable, the group of relationship (computed t value521.573 and respondents with a high level of WWW usage (i.e., top- Sig.5.121). third of users) from the group with a low level of WWW Hypothesis 3. Findings from both tests show support usage (i.e., bottom-third of users); for the second variable, for the positive relationship between reduced search the group of respondent who experienced an important costs and the move to ‘more market’. The Pearson’s rho reduction of search costs from the group with the lowest and the computed t were .501 (Sig.5.000) and 23.993 reduction of search costs; and for the third variable, the (Sig.5.000) respectively. group of respondents who experienced an important reduction of coordination costs from the group with the Hypothesis 4. Results of both statistical tests support lowest reduction of coordination costs. In all three cases, the expected relationship between reduced coordination the group in the middle was discarded. For each recoded costs and the move to ‘more outsourcing’. The variable,thetwogroupswereofcomparablesizeandttests Pearson’s rho was .442 (Sig.5.000) and the computed were used to assess the stability of the results from t was 24.803 (Sig.5.000). the Pearson correlation. A 5% level of significance was used for all the statistical tests. Findings are summarized in Table 4. DISCUSSION

The WWW is an electronic marketplace that links users Hypothesis testing acting as potential buyers to thousands of vendors that have set up commercial websites. Corporate buyers Hypothesis 1. Results of both the Pearson correlation using the WWW to carry out their procurement tasks can and the independent-sample t test show that WWW expect some benefits. These benefits would depend on usage is significantly associated with a reduction in the commercial websites’ functionalities buyers use corporate buyers’ search costs. The computed Pearson’s during the procurement process.

Table 4. Hypotheses testing Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010

High-level users (N534) Low-level users (N532) Computed t (t test) Pearson’s rho (N5110)

Mean St. Dev. Mean St. Dev.

Hyp.1 RSC 5.64 1.32 4.48 1.65 23.142 .346** Hyp.2 RCC 3.45 1.54 2.87 1.46 21.573 (NS) .231* Users with high RSC (N534) Users with low RSC (N533) Computed t (t test) Pearson’s rho (N5110)

Mean St. Dev. Mean St. Dev.

Hyp.3 MM 4.99 1.57 3.46 1.56 23.993 .501** Users with high RCC (N533) Users with low RCC (N534) Computed t (t test) Pearson’s rho (N5110)

Mean St. Dev. Mean St. Dev.

Hyp.4 MO 3.02 1.44 1.70 0.66 24.803 .442**

** Significant at the .01 level * Significant at the .05 level (NS) Not significant at the .05 level Electronic Markets Vol. 15 No 3 221

When using the WWW to support their identification and social relationships that may not be easily developed and selection tasks, corporate buyers can expect to through electronic interfaces (Kraut et al. 1999; Uzzi reduce their search costs. Our findings show that WWW 1997). usage is associated with a reduction in search costs, WWW-based reductions in search costs and in which may suggest that WWW electronic communica- coordination costs are themselves associated with tion and brokerage effects help corporate buyers to changes in organizations’ boundaries. In accordance quickly and easily identify potential suppliers and, when with past theoretical research, our model suggests that the relevant information is available on the websites, to transactions involving standard inputs and occurring at a select their suppliers better. lower frequency are likely to change governance When using the WWW to place orders, make mechanisms as a result of such reductions in search payments or check the status of their purchases, costs and coordination costs. For those transactions, the corporate buyers can benefit from its electronic integra- reduction in coordination costs is associated with a move tion effect, that is, the additional information and/or to ‘more outsourcing’, whereas the reduction in search additional information processing capacity that help costs is associated with a move to ‘more market’, buying organizations reduce their external coordination implying that buyers will deal with new and more costs. Results of this survey do not clearly support the suppliers in order to reduce the total cost of inputs. Our hypothesized relationship between WWW usage and data show evidence for both moves. First, respondents reduced coordination costs: only the correlation analysis who report important reductions in coordination costs shows support for the relationship and that relationship tend to also report a distinctive shift to ‘more out- is not as strong as the one between WWW usage and sourcing’. Based on the TCE framework, low-frequency reduced search costs. Such finding may appear surprising activities do not benefit from economies of scales or when an abundant IS literature presents the decrease of specialization effect and should have a lower production coordination costs as a consequence of IOS usage. A cost in the market. The WWW-based reduced coordina- possible explanation is that IS literature has investigated tion costs and the lower production cost in the market IOS such as Electronic Data Interchange, Value Added make outsourcing these activities a logical solution. This Networks and other proprietary electronic marketplaces shift to outsourcing is even more likely to occur when used extensively for the online execution of transactions the activity to be externalized involves a standard input, and that tend to be more integrated to other IS in which is normally widely available on the market. buying organizations. In this context, benefiting from Second, respondents who report important reductions WWW-based reduced coordination costs would imply in search costs tend to also report an important move to first that corporate buyers are extensively using transac- ‘more market’. As an electronic marketplace, the WWW tional websites and second that suppliers’ transactional can reduce buyers’ search costs and increase price-based websites are – to some extent – integrated to buying competition among vendors, making it easy and valuable organizations’ IS. Descriptive statistics for our data set for users to search the market for a better deal before show that respondents use the WWW essentially to purchasing inputs. In accordance with TCE-based identify and select suppliers and marginally to execute literature, results from this survey show that transactions transactions. As a result, WWW usage should be more occurring at a low frequency and involving standard Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010 associated with a reduction in search costs than with a inputs are more likely to be subject to that shift because, reduction in coordination costs. As for the possible normally, they do not benefit from price discounts and integration of a buying organization’s IS to a supplier’s are considered low risk. Because of the low risk commercial website, although not measured in this associated with standard inputs and of the absence of research, one may expect it to be low as the power of the price discounts associated with infrequent purchases, WWW stems from the fact that it is an open electronic buyers face no switching costs. This absence of switching marketplace that requires no particular IT investment costs, the reduced search costs and the increased price- from buying organizations. Another possible explana- based competition in such electronic marketplaces make tion is that this ‘free for all IOS’ does not help test for the shift from electronic hierarchies to electronic markets trust and cooperation between business partners. Trust a logical solution. and cooperation have been found to influence IOS It should, however, be noted that, based on descrip- adoption, as these IOS often require that partners invest tive statistics from Table 4, the move to ‘more market’ is in specific assets that would have a much lower value in more distinctive than the move to ‘more outsourcing’. an alternative use should the original business relation- This suggests that WWW usage is more often linked to ship be prematurely terminated (Williamson 1985). organizations dealing with new suppliers for inputs they From this perspective, one can argue that the uncertainty were already buying than for inputs they were producing responsible for the coordination problem is not reduced themselves. This limited move to ‘more outsourcing’ only by additional information and information proces- may be due to the less important reduction in sing capacity but also by trust and cooperation between coordination costs previously discussed. It may also be business partners (Iacovou et al. 1995) and by personal due to a restricted number of activities eligible to such a 222 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets

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Appendix A: Sections of the questionnaire used in this research Downloaded By: [Schmelich, Volker] At: 20:44 23 March 2010