REVIEW JOURNAL: Adoption Correlates and Share Effects of Electronic Data Interchange Systems in Marketing Channels

Title	:	Adoption Correlates and Share Effects of Electronic Data Interchange Systems in Marketing Channels
Author	:	Ramón O’Callaghan. Professor, Information System, IESE Patrick J. Kaufmann, Professor, Harvard University Benn R. Konsynski
Source		Journal of Marketing, IESE Business School – University of Navarra
Abstract	:	The establisment of electronic information interchange linkages between channel members offers significant potential in the transformation of their relationship, with significant benefits available for all participants. The author examine the adoption of a particular form of electronic data interchange (EDI): the computer-based interface offerings by insurance carriers to their independent agent communities. The study examines adoption considerations and post-adoption effects. Implications for system design are discussed.
keyword
Cash and Konsynski, 1985; Malone, Benjamin, and Yates, 1987; Bakos, 1987; Johnston and Vitale, 1988; Konsunski and Warbelow, 1989	:	Inter-organizational systems employing information technology may represent the most important technology breakthrough in distribution channels since air transport. Not only is it likely that these systems will radically alter the competitive landscape of industries, but there is growing consensus that computer-based inter-organizational system will have significant impact on the relationships between channel members as well
Mcgee and Konsynski, 1989	:	In this paper, they focus on  particular category of inter-organizational systems, Electronic Data Interchanges (EDI)
Stern nd El-Ansary, 1982	:	EDI is used to designate a system based on information technology that links channel members for the purpose of facilitating the flow of a product or service through the channel
Frazier, 1983	:	Although there are industry-created EDI systems, here the EDI system is assumed proprietary to an initiating (or “source”) firm.
Rogers, 1983; Farley et al., 1987	:	When other channel members ()or “target” firms) are offered the opportunity to establish an electronic linkage with the source firm, they are faced with the difficult decision whether to adopt an innovative, costly, and often unfamiliar technology
Stern and Reve, 1980	:	The adoption of an EDI linkage, however, is significantly different from the adoption of an innovative internal technology. EDI produces changes in the exchange relationship between the participating firms which have implications for both the internal economy and polity of the channel.
The establishment of a sophisticated computer linkage between firms reflects a significant commitment to the relationship.
Macneil, 1980, Dwyer, Schurr, and Oh, 1987	:	Discrete transactions are subsumed in creation of a long-term, complex relational exchange.
Monczka and Carter, 1989	:	This requires attention not only to the efficiency effects of the technology, but also to the effect it will have on the business relationship between the parties.
Achabal and McIntyre, 1987	:	The proliferation and impact of EDI has been remarkable
Canright, 1988	:	In January 1988 it was reported that 75% of the fortune 100 and 39% of the fortune 500 were using form of electronic data transmission method to perform traditional business communications processes including, for example, ordering, invoicing, and providing shipping or backorder notifications.
EDI systems are designed to deliver transactional efficiencies to both firms. Adoption of EDI, however, may impose significant one-time costs on target firms as they adjust their internal systems to permit the interface with the source firm. On the other hand, the source firm endures the EDI system development and maintenance costs, not only to achieve those transactional efficiencies, but also to alter its relationship with the target firm. If the source firm is a buyer, that alteration of the relationship may result in greater coordination in the flow of inputs. If the source firm is a supplier, the change may result in an increased share of the target firm’s business. An increases in the source firm’s share of the target firm’s business, however, presumes an increase in the attractiveness of the source firm relative to its competitor. To the extent that the target firm can easily  establish EDI linkages with additional source firms, that relative competitive advantage is jeopardized.
Firms developing EDI technology are faced with design and marketing decisions as well as the need for evidence of competitive advantage necessary to justify their investment. In this study they draw on adoption of innovation theory to formulate and test predictions concerning the conditions under which target firms will be likely to accept the EDI technology. And explore the relationship between the establishment of an EDI link and the share of (buying) target firm;s business given to the (selling) source firm.
Adoption of EDI Technology (the factors is expected to have an impact on the likelihood of EDI Adoption)
1.       Relative Advantage
EDI is not only a new technology for channel members. It is a fundamental change in the way they do business with each other.
Crosby and Stephens, 1987	:	Study of the highly competitive insurance industry demonstrated the importance of channel efficiency in the delivery of the core product. The formalization of communication and ordering through EDI, therefore, provides a possible response to competition in the output market. If the level of competition in an industry is nontrivial and constant, variance in firm level adoption of EDI should reflect differences in the perceived efficiency and service producing characteristics of the system. Therefore,
		H:1 The greater the perceived relative efficiency advantage that EDI provides compared to transacting business without an electronic linkage, the more likely the adoption of EDI by the target firm H:2 The greater the perceived relative customer service advantage that EDI provides compared to transacting business without an electronic linkage, the more likely the adoption of EDI by the target firm
2.       Compatibility
McGuiness and Little, 1981	:	The perceived compatibility of EDI in the target organization relates to two distinct factors: physical system compatibility and organizational (i.e. personnel) compatibility
System incompatibility is often a major impediment to the institution of a linkage across trading partners. Partners need to anticipate issues on the compatibility of hardware and software (connectivity), message and timing protocols, on-going support and maintenance costs and operations and management processes for dealing with exception situations. In addition, the upfront investment required to establish the connection in preparation of systems, and the modification of existing computer systems to support the information interchange add significantly to the costs of implementing an EDI linkage. Organizational incompatibility requires significant attention to defining the nature and form of the information interchange. All too often, the initiating source firm assumes that the target firm is at the same level of sophistication as the technology. Furthermore, the internal culture and management practices may be quite different, resulting in communications problems. Both parties need to be  sensitive to issues in the partnering organizations, such as the organizational disruptions associated with implementation; staffing the required skills; the time necessary to develop and learn the operation of the interface; changes in operating procedures; and the initial productivity loss due to the learning and adaptation process. therefore,
		H:3 The greater the perceived incompatibility of EDI with its existing physical systems, the less likely the adoption of EDI by the target firm H:4 The greater the perceived incompatibility of EDI with its existing organization, the less likely the adoption of EDI by the target firm
3.       External Influences	:	EDI Adopters H:5 The greater the perceived influence of EDI adopters on the EDI adoption decision of the target firm, the more likely EDI adoption The Source Firm H:6 The greater the perceived influence of the source firm on the EDI adoption decision of the target firm, the greater the likelihood of EDI adoption Industry Representativeness H:7 The greater the felt influence of industry representative on the EDI adoption decision of the target firm, the greater the likelihood of adoption
Post-adoption Effects: EDI and Market Advantage
The differentiation opportunities of EDI can be viewed as the opportunities afforded by a technological innovation that allows the firm deploying the EDI to provide a level of service better than that previously experienced in the industry. The uniqueness of the innovation allows the firm to differentiate itself on the basis of superior service, which increases the likelihood of channel commitment and source loyalty. This differentiation should have a positive effect on its share of the linked buyer’s business. Therefore,
		H:8 When a supplier establish an EDI linkage with a buyer, the supplier will increase its share of the buyer’s business
The Study
Sampling Methodology and Measurement Pretests
-          Sampling : the property and casualty insurance industry, which sold policies through two distinct channel of distribution. ( company employees as exclusive agent and independent insurance agents) -          To examine the inter-organizational aspects of EDI adoption, they confined their study to the link between independent agents and the insurance carriers. -          EDI-developing carriers serve as the “source firms” in this study with the focus of the research on the EDI adoption decision of the “target” independent agencies. -          Ten field interviews were conducted with independent agents to develop a tentative list of issues which could be used to operationalize the relative advantage, compatibility, and external influence sources hypothesized to impact EDI adoption decision. -          The survey was sent 5000 agency principals drawn at random from the 40000 members of the Independent Insurance Agent of America (IIAA). -          To determine the representativeness of the sample the respondent profiles were compared to those of two 1987 proprietary studies of EDI in the insurance industry. -          The two studies permitted comparison with the present study on three variables: size of the respondent agency, percentage of agencies using EDI linkages, and the insurance carriers represented by the agents. -          Chi-square test on all three variables revealed no significant differences (p<0.05) between the respondent profiles in this study and the two other random samples of the agency population.
Data Analysis and Result -          There are two separate sets of test were conducted in this study. -          The first set examine the hypothesized determinants of EDI adoption reflected in H:1 through H:7 -          The second set of test examined the hypothesized share effects reflected in H:8
Discussion and Implications EDI technology offers tremendous operational benefits to linked firms. EDI has the unusual quality of providing significant benefits to both sides of the dyad. The EDI developer not only delivers cost savings to its channel partners, but also enhances the services it provides while reducing its own cost of operation at the same time. To achieve the benefits of EDI, there are initial investment costs which must be borne by both the developer firms and the adopter firm. In the insurance industry, systems have been developed specifically to serve the strategic purposes of particular insurance companies.
Konsynski and Warbelow, 1988	:	A good example of such an arrangement involves Aetna which, through its GEMINI system, offers its agents a fully integrated proprietary system that includes a back-office-agency management system together with an electronics linkage to the company’s mainframe. Although this approach significantly the cost of the target firm’s initial adoption, it also makes adoption of additional interfaces very costly.
Konsynski and Warbelow, 1987	:	At the other end of the spectrum, there are insurance companies, like Maryland Casualty, that take pride in facilitating the implementation of EDI by adapting themselves to whatever equipment the agents have, and using the public value-added network of the industry. Typically, the solution is a stand-alone PC that de-couple the internal agency at the expense of full data integration with the agency’s internal computer processes and database. This approach significantly reduces the cost of the initial adoption, but leaves the source firm subject to easy adoption of additional links by the target firm
In summary, the challenge for EDI source firm to design a system which 1) facilitates the initial adoption; 2) ensures the desired post-adoption business effects, and 3) ensures the long term retention of those desirable effects by discouraging additional linkages