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Weekly UpdatesEXECUTIVE SUMMARY
A problem for small businesses acting entrepreneurially through extending their business onto the web is that they often lose their primary value-added proposition: the personal focus on the customer. As a result, the entrepreneur is left searching for ways to differentiate him/herself. Unfortunately, entrepreneurship literature, based on sound theoretical principles, has not been forthcoming with solutions to this problem. This paper addresses both of these issues by providing to entrepreneurs a guide with which they may gain a competitive advantage while engaging in e-commerce. We blend theoretical perspectives from the resource-based view of the firm with elements of transaction cost economics to better understand entrepreneurial e-commerce initiatives. Furthermore, we discuss and develop theory suggesting that trust is central to entrepreneurial survival and competitive success when engaging in e-commerce.
INTRODUCTION
According to a report published by the US Small Business Administration, 35 percent of small businesses are selling online and are developing "imaginative ways to conduct e-business" (Pratt, 2002, p. ii). Pratt's research suggests that e-commerce may be an effective way for small businesses and entrepreneurs to reach new customers, increase sales, and be more competitive in the marketplace. With the great changes for business that the Internet has created, it is not surprising that some entrepreneurial firms have not found the Internet to be a friendly operating environment. In fact, it has been estimated that over 95 percent of all dot.coms are doomed to fail (Useem, 2000). The demise of such firms as Boo.com, HealthShop.com, or ToyTime.com offer direct evidence that entrepreneurial e-commerce projects face certain and tremendous obstacles. During times of change, it would be comforting if academics or practitioners could turn to theory for guidance, as theory can help make our world more predictable and help us determine why failures occur (Christensen & Raynor, 2003). Unfortunately, concerns about the lack of theory-based research have plagued entrepreneurial research (Zahra & Dess, 2001) and much of the work on entrepreneurial e-commerce has been anecdotal in nature. As a result, scholars and practitioners have few theoretical mechanisms with which to understand or predict entrepreneurial e-commerce outcomes. This is particularly troubling given the large failure rate of entrepreneurial e-commerce launches.
In response to the scant theory on entrepreneurial e-commerce coupled with the tremendous failure rate associated with these initiatives, we develop and advance theory built on the resource-based view of the firm and transaction cost economics to better understand and predict the entrepreneurial e-commerce phenomenon. This theory-driven approach provides a foundation that affords us the opportunity to make prescriptive recommendations to entrepreneurs that would allow them to more fully exploit their e-commerce potential with consumers and, as a result, make e-commerce strategy a critical component to achieve competitive advantage in the market. This work adds value to the entrepreneur as these firms often lose one of the major value-added tenets of their business- personal focus on the customer- as they venture onto the web. The strategies and tactics suggested can help them regain these advantages.
THE RESOURCE-BASED VIEW OF THE FIRM
The resource-based view (RBV) of the firm holds that it is a firm's resources, obtained by the acquisition or building of unique capabilities, that creates inter-firm heterogeneity and thus is responsible for performance differences (Barney, 1991; Rumelt, 1984; Wernerfelt, 1984). According to this perspective, resources must be valuable, rare, costly to imitate, and non-substitutable to contribute to competitive advantage (Barney, 2001). Resources can be classified as financial, physical, human, and/or organizational. A chief concern for today's firm is the ability "to innovate by searching out new resources, or new ways of using existing resources" (Galunic and Rodan, 1998, p. 1193).
In a hyper-competitive environment, such as the entrepreneurial e-commerce arena, the exploitation of resources is critical. Unique resources possessed by the firm lead to the creation of Ricardian rents for the firm, which are those rents achieved through the owning of scarce resources that others do not possess (Ricardo, 1817). Ricardian rents create firm heterogeneity and, are one of the cornerstones of competitive advantage (Peteraf, 1993). For e-commerce initiatives to be successful and serve as a point of differentiation, a firm must possess or create internal e-commerce resources, which management must then integrate to complement its traditional business model (Porter, 2001).
TRANSACTION COST ECONOMICS
Transaction cost economics (TCE) has developed over the years to be an informative theory in management research. TCE is "an effort to identify, explicate, and mitigate contractual hazards" with the main purpose of economizing (Williamson, 1996, p. 12). Major assumptions of the TCE framework are that actors (individuals or firms) engage in opportunistic behaviors, that actors need assets in different frequencies, and that certain unique assets must be acquired to accomplish personal or organizational goals (asset specificity). An appealing aspect of TCE is that the unit of analysis, the transaction, can be studied between individuals, between firms, or a combination of the two. TCE can be informative to the entrepreneurial e-commerce arena in many ways. For example, intermediaries (e.g. PayPal) are sometimes used in e-commerce transactions because of the belief by both buyer and firm that the other party may act opportunistically over an Internet medium as opposed to a traditional brick and mortar workplace. Thus, understanding how consumers interact with an entrepreneurial firm in e-commerce space can be partially understood through TCE.
Many researchers, however, see problems with utilizing TCE on its own. Ghoshal and Moran (1996) state that TCE ignores firm capabilities and their social dimension. Any strategic theory of the firm should address not only "production and exchange, but also take into account how a firm's resources and capabilities can best be developed and deployed in the search for competitive advantage" (Madhok, 2002, p. 541). Based on this reasoning, we integrate both the Resource based view of the firm with Transaction cost economics to arrive at a more holistic and comprehensive theoretical model of entrepreneurial e-commerce initiatives.
TRUST, COMPETITIVE ADVANTAGE, AND ENTREPRENEURIAL E-COMMERCE
To date, the centrality of trust within the entrepreneurial literature, in general, and the entrepreneurial e-commerce literature, in particular, has been overlooked or discounted. This is surprising since trust can satisfy two primary conditions required of both the resource-based view and TCE perspectives. Namely, firms can create and use trust as a resource leading to competitive advantage. Also, both internal and external trust can mitigate contractual hazards between parties within a firm and between the firm and an external buyer, which minimizes transaction costs. Because entrepreneurial e-commerce requires both the exploitation of resources along with smooth and efficient transactions internal and external to the firm, trust can play a pivotal role in ensuring entrepreneurial e-commerce survival and help provide the firm with a source of competitive advantage.
Trust is the "reliance by a person, group, or firm upon a voluntary accepted duty on the part of another person, group, or firm to recognize and protect the rights and interests of all others engaged in a joint endeavor or economic exchange" (Hosmer, 1995, p. 393). We discern between internal trust, which is the goodwill between individuals, groups, and human capital within a firm and external trust, which captures the goodwill between the firm and external stakeholders to include buyers or suppliers. Trust is a resource necessary for entrepreneurial e-commerce under the resource-based view because it impacts the quality of the product and service that a firm can provide or offer. From the TCE perspective, trust, or lack thereof, can influence why firms do not offer a particular good or service or why exchange between parties do not occur. Figure 1 depicts this model.
[FIGURE 1 OMITTED]
Under the first link, internal firm trust is necessary to produce a superior e-commerce service or experience. Trust is, indeed, a resource that contributes to a competitive advantage because it tends to be rare, valuable, inimitable, and non-substitutable (Barney, 1991). Trust encourages boundaryless behavior among managers and executives, whether entrepreneurial or corporate (Kanter, 1988). Trust between key personnel within an entrepreneurial venture also promotes informational diversity and heterogeneity. Trust becomes a necessary conduit for knowledge flows and knowledge transfer between key personnel within a firm (Yli-Renko, Autio, & Sapiencza, 2001). Not surprisingly, these attributes are necessary and critical to innovate and to respond to dynamic markets (Kanter, 1988; Tushman, 1977). Because e-commerce initiatives require creativity, constant evaluation in response to a dynamic market, and continual modification, internal firm resources, as suggested by the resource-based view of the firm, are necessary to accomplish these sophisticated and complex e-commerce objectives.
The second tie in Figure 1 uses the TCE perspective to explain not the production of an e-commerce good or service, but rather focuses on the trust required for transactions between the firm and its clientele over the Internet medium. We acknowledge that TCE does not discount internal organizational trust. On the contrary, trust can be a product of clan-like cultures within firms (Ouchi, 1980). Clans require less monitoring and reduce the need for high cost bureaucratic systems and controls. Consequently, these firms spend less time and money designing and enforcing internal contracts. This efficiency is particularly important to entrepreneurial firms, which may not have abundant resources to fund e-commerce projects nor possess the expertise to design elaborate bureaucratic controls and systems.
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