Investigating the Impact of Firm Strategy-Click-and-Brick, Brick-and-Mortar, and Pure-Click-On Financial Performance

Article excerpt

Abstract:

Building on the resource-based view, this study compares the financial performance of three different types of firms: click-and-brick (CB), traditional brick-and-mortar (BM), and pure-click (PC) firms. We select twenty-one firms from each type and examine their financial performance using profitability and cost ratio analysis for the period from 2000 to 2004. The results of our ratio analysis indicate that the average profitability and cost structure vary by firm type. Firms that conduct their business using both traditional-physical stores and the Internet achieve significantly higher profitability than comparable firms that either use only traditional-physical stores or solely rely on the Internet. Furthermore, the cost structures of the firms that conduct their business using both traditional-physical stores and the Internet appear to be comparable to the traditional firms. In contrast, the pure-click companies that rely solely on the Internet for doing business seem to experience higher overall costs. These results are of practical relevance for the managers in the pure-click firms who may face less favorable cost structures as compared to other firm types.

Keywords: E-commerce, pure-click, click-and-brick, brick-and-mortar, financial performance, resource-based view

INTRODUCTION

The Internet has transformed the way organizations conduct their business today. The number of firms that take advantage of Internet technology increased rapidly in the late 1990s and early 2000s. Subsequently, e-commerce sales increased continuously and will continue increasing, according to Forrester Research. In 2007, e-commerce sales in the U.S. reached $175 billion (excluding travel); this was a 21 percent increase from 2006. In fact, Forrester Research predicted that e-commerce sales would reach $204 billion in 2008 and $334.7 billion in 2012, a surge of growth rising approximately 14 percent annually from 2007 until 2012 (Rosencrance 2008). In contrast, the sales at physical stores are expected to grow only 2.6 percent annually for the same period.

In essence, there are three types of firms that differ in adopting the Internet to their business operations. The first type of firms are companies that operate their business transactions exclusively in an electronic online market and are heavily dependent on the Internet (Koo, Koh, and Nam 2004). These firms are called online firms, "pure plays," Internet firms, dotcoms, or "pure-click" (hereinafter refer to as PC) firms (Mahadevan 2000). These firms interact with customers solely through the Internet website and without any face-to-face contact (Enders and Jelassi 2000). In contrast to the PC firms, the second type of firms are the traditional firms, or "brick-and-mortar" (hereinafter referred to as BM) firms. The BM firms conduct only traditional business operations with physical stores and do not use the Internet as the means of e-commerce. These firms have only face-to-face contact with their customers via physical locations. The websites of these firms, if present, are used to disseminate information about the firm, the firm's products and/or services, and the firm's physical locations (Saeed, Grover, and Hwang 2003). The third type of firms, "click-and-mortar," also referred to as "click-and-brick" firms, (hereinafter referred to as CB) conduct their business using both means: traditional physical stores and the Internet. Accordingly, firms can be classified based on physical locations, e-commerce capability, and the degree of Internet usage as summarized in Table 1.

Since CB firms can wield the strength of both BM and PC firms, at first look, the CB firm type appears to be the most promising one in achieving better financial performance than the BM approach or PC approach. While there are a number of previous studies that have focused on each type of firm or the transformation from BM to CM firm (Bellman 2001; Ranganathan, Goode, and Ramaprasad 2003; Razi, Tarn, and Siddiqui 2004; Venkatraman 2000), there is little empirical research that has investigated whether financial performance of CB firms are, indeed, superior to firms that conduct their business exclusively online or only by utilizing traditional physical stores. …