3.2 What Drives E-Business Diffusion among Firms?

Evidence from European Companies

by Kenneth L. Kraemer, Kevin Zhu & Sean Xu (University of California, Irvine), and Werner
B. Korte and Karsten Gareis (empirica GmbH)86
3.2.1 Introduction
As Internet-enabled electronic business (e-business87) has been widely adopted by firms in a variety
of industries to support value chain activities (Zhu et al. 2003), there is a growing need to better
understand the factors that drive organizational adoption of e-business. We investigated this issue
from three perspectives. Firstly, viewing e-business as a technological innovation (Rogers 1983), we
examined impacts of e-business characteristics on organizational adoption from an innovation
diffusion perspective. Secondly, since the success of innovation adoption might be affected by the
contexts in which it is adopted (Tornatzky and Fleischer 1990), we also incorporated influences of
contextual (i.e., technological, organizational, environmental) factors. Thirdly, as features of the
innovation and the adoption environment often interact to reinforce one another (Tornatzky and Klein
1982), we felt it was important to study the interaction effects of the innovation characteristics and
contextual factors, which we defined as the “fit” between the innovation and its adoption contexts.
We integrated the three perspectives into a conceptual framework for studying e-business adoption,
and examined the following research question:
How do e-business characteristics, adoption contexts, and the fit between them affect organizational
adoption of e-business?
In the next section, we present hypotheses about the adoption drivers, followed by our research method
and empirical results. We conclude with a discussion on major findings and implications for both
managers and policy-makers.

Empirical results
As demonstrated in Exhibit 3.2-1, revenue advantage, cost advantage, and compatibility emerge as
adoption drivers, while adoption costs and security concerns are shown to be adoption inhibitors.
Thus, we found support for all of the hypotheses on e-business characteristics (H1a-H1e).
Regarding the influence of contextual factors, we found that technology competence, firm size,
consumer readiness and partner readiness had significant and positive coefficients, but firm
scope and competitive pressure had insignificant coefficients. These results suggested that
technology competence, firm size, consumer readiness, and partner readiness had positive influences on
ebusiness adoption, but e-business adoption was not affected by firm scope and competitive pressure.
Thus, we found support for four hypotheses on technology competence (H2a), firm size (H2b),
consumer readiness (H2d), and partner readiness (H2e), but not for the two hypotheses on firm scope
(H2c) and competitive pressure (H2f).

H2a: Firms with higher levels of technology competence are more likely to adopt e-business.
H2b: Larger firms are more likely to adopt e-business.
H2d: Firms facing higher levels of consumer readiness are more likely to adopt e-business.
H2e: Firms facing higher levels of partner readiness are more likely to adopt e-business.

After testing these main effects of e-business characteristics and adoption contexts, we proceeded to
examine the interaction effects as hypothesized earlier – the “fit” effect.
Thus, we only found partial support for hypothesis H3a.
Other results in Exhibit 3.2-2 showed that cost advantage, adoption costs, and technology
competence had different regression coefficients between subgroups defined in terms of competitive
pressure, technology competence, partner readiness, and compatibility. The associated Wald tests
were all significant (significance below 0.05). Thus, we found strong support for hypotheses H3b-H3e.

H3a: The influence of revenue advantage on e-business adoption will be stronger given higher levels
of competitive pressure.
H3b: The influence of cost advantage on e-business adoption will be stronger given higher levels
of competitive pressure.
H3c: The influence of technology competence on e-business adoption would be stronger given
higher levels of e-business compatibility.
H3d: The influence of adoption costs would be weaker given higher levels of technology
competence.
H3e: The influence of adoption costs would be weaker given higher levels of partner readiness.

3.2.4 Major Findings

E-business characteristics
The results on e-business characteristics have demonstrated the power of the classic innovation
diffusion theory for understanding e-business adoption (Rogers 1983; Tornatzky and Klein 1982). As
shown in Exhibit 3.2-1, the relative advantage and compatibility facilitate e-business adoption, while
firms’ concerns about e-business adoption costs and security inhibit e-business adoption.
Further, our study decomposed the relative advantage of e-business into two finer-grained
dimensions: revenue advantage and cost advantage, both of which have been shown as significant
adoption drivers. This result has demonstrated different orientations of e-business usage: market
orientation, and operation-orientation. Our study incorporates the two orientations in one model and
confirms their effects in driving e-business adoption. However, their effects may vary across different
competitive environments, which will be discussed below.
The last innovation characteristic, security concerns, is unique to the e-business phenomenon. The
significant and negative regression coefficient reveals managers’caution regarding security on the
Internet. Such concerns seem to be related to the very nature of the Internet – its wide connectivity
and open-standard structure – as well as to the immature institutional frameworks for privacy
protection and enforcement of online contracts for both businesses and their customers. These
features make security an important concern in e-business adoption decisions, and may continue to
do so in the future.

Adoption contexts
Within contextual factors, we have found that technology competence, firm size, consumer readiness,
and partner readiness are adoption facilitators. In particular, firms need to possess technology
competence for smooth e-business adoption. Our conceptualisation of the technology competence
construct sheds light on the composition of technological capability, in that both physical infrastructure
and intangible knowledge (i.e., Internet skills) are important constituents. In addition, both consumer
readiness and partner readiness are significant. This suggests that e-business adoption is more a
value-chain phenomenon than an individual firm’s problem. E-business is essentially a network of
companies (value chain partners). This supports the inclusion of environmental factors in our
conceptual model.

Innovation-context fit
We have tested how contextual factors moderate e-business characteristics to influence
e-business
adoption. Below we highlight three findings based on our subgroup analysis:
1. The potential of e-business for cost reduction becomes more important as
industry competition
becomes more intensive, which indicates the importance of an operations-
orientation in e-business usage for competitive advantage.
2. Technology competence facilitates e-business adoption only when firms
possess compatible skills, distribution channels, and corporate culture, which
highlights the complementarity between
technological readiness and organizational readiness.
3. Firms with greater technology competence and partner readiness are less
concerned about
adoption costs, which seems to suggest that technology competence and partner
readiness can
help adopting firms to efficiently leverage e-business investments.

3.2.5 Managerial and Policy Implications

Our study offers several implications for managers. Firstly, our conceptual model provides a systematic
framework that managers can use to assess their organization’s readiness for adopting e-business.
Secondly, our results suggest that firms must pay great attention to their technological capability to
adopt e-business, and keep in mind that technology competence constitutes both physical
infrastructure and intangible knowledge, such as Internet skills.
Thirdly, the results also point to the importance of using e-business for cost reduction as industry
competition becomes more intensive.
Our results also highlight the critical role of compatibility of the innovation with the organization’s
previous technology, corporate culture, and business partners. The importance of compatibility has
been projected through both the main effect and the interaction effect of compatibility with technology
competence. The results imply that to fully leverage their technological resources (e.g., IT
infrastructure), firms must also build managerial knowledge about how to deploy the technology within
their organizations, as well as user skills to employ it effectively.
Toward this end, vendors need to offer applications, services, and training programmes for
individual firms – but these must be tailored to the needs of specific industries.

>>> So: there are some general characteristics that explain e-business adoption, but
each application ideally needs to be tailored to a specific industry as well as a specific
firm within that industry to gain maximum benefit and ‘fit’.

>>> More importantly, e-business has primarily an internal operations focus and
particularly with regards to networking and the value chain. It is thus first an internal
operational tool, and secondly a marketing tool. (Innovation context fit)