Antecedents and consequences of Internet channel performance

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Abstract

Internet distribution channels may be either advantageous or detrimental for a company. Therefore, this study analyzes their performance, antecedents, and effect on company performance. Using survey data from multichannel retailers and structural equation model methodology, the authors show that Internet channel performance contributes to both financial and strategic company performance, with a greater effect on the latter. Similar and uncoordinated channels hinder Internet channel performance, but experience with direct channels and channel power are not required to pursue an Internet channel successfully. Customer migration and managerial commitment to the Internet channel have strong positive influences on financial performance. Overall, the results encourage the adoption and development of Internet channels.

Introduction

The emergence and popularity of the Internet has encouraged an increasing number of companies to use it as an additional distribution channel (e.g., Ellis-Chadwick et al., 2002), which provides many opportunities, including access to new markets, increased sales, and reduced costs (Geyskens et al., 2002). In addition, consumers who have switched to the Internet channel or use multiple channels are more profitable than their offline counterparts (Gensler et al., 2008; Hitt and Frei, 2002). However, the Internet channel also poses some threats: it requires a high initial investment but takes off rather slowly (only 3.5% of retail sales were conducted online in 2007; US Census Bureau, 2007), and it may cannibalize other channels. Competition in the online environment also may decrease prices and margins (Degeratu et al., 2000) or prompt channel conflict. Furthermore, the Internet channel could lead to diminished customer profitability as a result of less loyalty or lower purchase frequency (Ansari et al., 2008; Sullivan and Thomas, 2004).

As a result, it remains unclear whether the Internet channel itself provides strong performance and, even if it does, whether this performance contributes to the overall performance of the company. Yet, channel performance evaluation is crucial for designing an appropriate multichannel distribution strategy in terms of optimal channel mix, channel design, level of channel independence, and resource allocation across channels (Neslin et al., 2006). Information about channel performance also helps determine appropriate pricing, assortment, and service level decisions (Neslin et al., 2006).

Despite this importance, previous research into the performance of Internet channels and their contribution to company performance remains very scarce. Existing studies analyze the effects of introducing an Internet channel on expected future cash flows, measured by the company's stock prices (Geyskens et al., 2002; Lee and Grewal, 2004). Yet these investigations fail to consider whether the Internet channel actually generates sales and profits for the company. In addition, the results of these studies might be confounded in mature stages, because some successful Internet channel introductions do not lead to strong Internet channel performance. Consequently, even though many companies have followed market pressures and adopted Internet channels, little is known about their performance. Furthermore, the market valuation used in previous studies has several weaknesses, in that it overvalues new economy stocks (Higson and Briginshaw, 2000) and possibly reflects investors’ overly optimistic attitudes toward Internet-related investments. Finally, studies based on stock prices may provide insights for large, listed companies, for which an Internet channel likely attracts many new consumers (Brynjolfsson and Smith, 2000), but it neglects smaller companies whose Internet channel performance is less clear. Neslin et al. (2006) thus highlight the gap between the importance of this topic and existing research in this area and call for additional research into channel performance evaluations and the effects on company performance.

This study responds to that call by analyzing the performance of Internet channels and their influence on company performance, as well as their antecedents during the mature stage. We define Internet channel performance as a composite measure of the revenues generated by the Internet channel, as well as its growth and future potential. With regard to company performance, we distinguish between financial (i.e., global company sales, cost, and profitability) and strategic (i.e., global market share, competitiveness, and strategic position) performance (Cavusgil and Zou, 1994; Zou and Cavusgil, 2002). Furthermore, we build on work by Geyskens et al. (2002) to analyze drivers of Internet channel performance, including not only the factors they propose but also the effects of the support offered to the Internet channel and channel strategy characteristics, such as channel similarity and cooperation. Thus, we shed more light on the effect of channel cooperation, identified by Rangaswamy and van Bruggen (2005) and Neslin et al. (2006) as a major challenge for multichannel retailers. We also analyze channel cannibalization, its antecedents, and its effect on company performance, basing our results on a survey of 142 multichannel companies.

In turn, we contribute to existing literature by analyzing the effect of Internet channel performance during the mature Internet stage on both strategic and financial performance in a multichannel context. We show that Internet channel performance has a stronger positive effect on strategic than on financial performance, and in its mature stage, Internet channel performance mostly depends on management support. In contrast with previous predictions (e.g., Alba et al., 1997; Brynjolfsson and Smith, 2000; Geyskens et al., 2002), we find that a company does not need to be large or have channel power or experience with other direct channels to operate an Internet channel successfully. In addition, we empirically show that similar and uncoordinated channels hinder Internet channel and company performance. Finally, we contribute to channel cannibalization literature (e.g., Biyalogorsky and Naik, 2003; Deleersnyder et al., 2002), in that we not only analyze the degree of channel cannibalization but also determine its consequences for company performance.

The remainder of this article is organized as follows: First, we describe the theoretical framework and develop a conceptual model. Second, we describe the methodology and present the results of our empirical study. Third, we discuss the conclusions and provide some implications of our results.

Section snippets

Literature review

Many empirical studies focus on distribution channel strategies and the various factors that may influence channel performance. Buchanan (1992) analyzes the influence of trade partner dependence and environmental uncertainty on channel members’ performance. Many other studies focus on the influence of interdependence and power on channel performance (e.g., Brown et al., 1995; Lusch and Brown, 1996). Gaski and Nevin (1985) consider the influence of coercive and noncoercive power sources, whereas

Effect of Internet channel performance on company performance

A company's performance consists of two major dimensions: financial and strategic (Cavusgil and Zou, 1994; Samiee and Roth, 1992; Zou and Cavusgil, 2002). As the most important goal for a company, financial performance comprises sales growth, cost levels, and, eventually, realized profits. In contrast, strategic performance relates to the company's market position (e.g., market share, competitiveness), which in the long run influences the company's financial well-being. Changes in the

Methodology

We use a structural equation model and the well-recognized partial least squares (PLS) methodology to analyze the links in our conceptual model.

Data

The sample consists of 142 companies from Germany, Austria, and Switzerland that responded during October 2005–March 2006 to a mailed questionnaire. The criterion for inclusion is that all companies must operate multiple channels, including an Internet channel. The response rate equals 21%, and the sample size meets the requirements for the PLS analysis.

In single-informant studies, the possible threat of biased responses arises because of the selective perceptions of the informant (Lindell and

Conclusions

The results of our empirical study show that Internet channel performance increases both the strategic and financial performance of the company. Therefore, despite the various threats associated with the Internet channel, the net effect of its performance on the company is positive. Internet channel performance has a stronger effect on strategic than on financial company performance, which implies that the Internet channel helps improve the company's competitive position in the market, though

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