Proceedings of the 29th Annual Hawaii International Conference on System Sciences - 1996 Seven Levels of Interorganizational Connectivity An Examination of the U.S. Grocery Distribution Channel Theodore H. Clark Department of ISMT H o w Konq Universitv of Science and Technology - tclarkbusthk.ust.hk William T. Schiano Department of MIS Harvard Graduate School of Business Administration wschianoQ hbs.harvard.edu Abstract The potential for interorganizational systems (10s) to fundamentally redefine relationships among suppliers, buyers and even competitors within an indusltry and change industry structure has been described extensively (e.g., Badaracco [ll; Cash [21, Clemons [3]; Hammond [41; Malone et al., [41; McFarlan, [SI;Miller et al. [6]; O'Callaghan, [71). Recent interest in inter0rgani:zational connectivity, including EDI, has been fueled by the opportunitiescreated as a result of the dramatic reduction in communications costs, particularly for computer-tocomputer linkages and interorganizational connectivity (Scott Morton, [SI; Keen, [91). The digital connectivity applicationsnow being implemented were all teclhnically feasible in 1980, but prohibitively expensive (Scott Morton, [lo]). Transaction cost economics theory predicts that significant reductions in transacticm costs should enable new organizational and channel sbructures (Ciborra, 1113; Williamson, [12]). This paper examines interconnectivity within the grocery channel and suggests an interorganizational connectivity framework modeled in part on the I S 0 model of systems connectivity. This seven-level model of interorganizational connectivity and chnnel interdependence is illustrated using examples of processes that span multiple levels of interconnectivity and interdependence within the grocery channel between diflerent groups of customers and suppliers. 1. Introduction Case studies of grocery product manufacturers, wholesalers, and retail chains suggest that while a definite hierarchy of levels of IT-enabled interorganizational connectivity exists, not all relationships necessarily evolve to the highest level of \"virtual integration.\" Indeed, limits on executive attention preclude this level from being achieved by more than a small fraction of trading partners. Studies have found ED1 connectivity alone is not sufficient to generate substantial savings and organizational changes are necessary. Malone et. a1 [4] refer to the electronic integration effect, in which adjacent channel members create \"joint, interpenetrating processes\" at their interfaces. Skagen [13] in interviews with thirty companies found strategic and partnership benefits represent the chief gain for companies employing EDI. Brousseau [14] found ED1 could only be successful if business processes were standardized along with EDI, and \"the payoff of ED1 is not due to ED1 itself, but rather to the implementation of the new coordinating techniques\" (p. 333). This paper examines existing patterns of interorganizational connectivity within the U.S. retail grocery channel, suggesting a descriptive framework (modeled in part on the IS0 model of systems connectivity) for classifying progress in developing organizational interdependence. This seven-level model of channel cooperation and information sharing is illustrated using two examples of generic processes (product ordering and payment) that span multiple levels of interconnectivityand interdependence between different groups of customers and suppliers. Organizational boundaries and relationships in the grocery industry evolved over a period of several decades to minimize the sum of transaction and production costs (Clark, [15]). Badaracco [ll suggests reductions in transaction costs enable firms to join in information alliances or partnerships, reducing the need for integrated ownership structures. Although these network types of organizational and industry structures were always technically feasible, the associated Connectivity costs were too high relative to hierarchical modes of organization to make the networked organization practical (Malone and Rockart, [16]). Declining The paper is divided into five sections. This first section introduces the major themes and describes the overall format of the paper. Section two provides a brief review of the literature relevant to the issues addressed in this research and paper. The section describes the research design and methodology used to develop the research findings and mode1 presented in the fourth section of the paper. Finally, the implications of these findings for managers are discussed and several suggestions for extending this research are offered. 281 1060-3425196$5.000 1996 IEEE Proceedings of the 29th Annual Hawaii Intemational Conference on System Sciences - 1996 connectivity costs have enabled networked-organization structures to become a preferred design for many complex environments (Nolan and Croson, [17]). The economics literature on motivations for the formation of strategic alliances and the MIS literature on the motivations for interorganizational systems have diverged somewhat in recent years. Mody [18] defines an alliance as \"a flexible organization that allows firms with complementary strengths to experiment with new technological, organizational, and marketing strategies.\" In examining the literature on the role of information (and, by extension, information technology) in the motivations to form or sustain such alliances, we note that economic models of partnership tended to be modeled using analytical tools of incomplete contracts, reputation, and transaction costs analyses (e.g., Schmidt and Fellerman, [19]; van Koenig and Wijk, [20]). A bridge between these theoretical constructs a d established sociological perspectives on alliances (Kanter and Myers, [213) is needed. In contrast, studies of interorgnizational interdependence in the MIS literature have been more qualitative. In those papers which do take an integrative view, the emphasis lies mostly in explaining multinational expansion rather than innovative uses of technology for \"business as usual\" (Harrigan, [22]). a framework, built around repeated observation of common obstacles, that captures some of the difficulties of smooth transition j?om one level of interdependence to another, with or without the aid of 10s. The multistage structure of our model generates hypotheses testable across industries and over time within the retain grocery value chain. 3. Research Design and Methodology The research design integrates both case-research and phone-survey methodologies. Case-studies afforded the authors insight into the causal processes involved in a complex environment (Bonoma, [24]; Yin, [251), and are recommended by several authors as essential for understanding the complex interactions between technology and organizations, an essential element of research in MIS (Benbasat et al., [26]). In conducting research on phenomena that are not well understood, case research is often the most useful approach, enabling researchers to develop frameworks and models that can later be validated using more quantitative research methodologies. Case-based research can be especially powerful when the research design involves multiple case studies examining a single issue from different perspectives (Eisenhardt, [27]; Yin, [25]). Multiple sites were selected to explore changes in relationships between industry leaders. The case sites included two manufacturers, Procter & Gamble and Campbell; two retailers, H.E. Butt Grocery Company (HEB) and Hannaford Brothers (Hannaford); and three wholesale distributors,Wl, W2, andW3. Table 1 offers a brief description of these firms. We describe a preliminary, descriptive seven-stage path from independence to virtual integration, along with suggestions for empirical validation. In the spirit of Bensaou and Venkatraman [23]'sstudy of the automotive industry, we seek to describe a set of empirical regularities occurring in technology-enabled interorganizational relationships in the U.S. retail grocery distribution industry. We propose our preliminary seven-level structure not as a definitive taxonomy of interorganizational interdependence, but as Table 1. Site TYP Location 1993 Sales ($ millions) Industry Rank Case Study Reference Summary Data on Case Study Sites Campbell Manufacturer New Jersey 6,600b 12b Clark & McKenney (1994) Hannaford Brothers H.E.B. Retailer Retailer New England Texas 2,050~ 4,618~ 1C O 24c Clark, Croson, Schiano, Clark McKenney, & & McKenney (1995) Nolan (1994) W1, W2, W3 Wholesalers Regional >600c <26c forthcoming a source: chemical week, may, 1994. b food processing, december, c progressive grocer marketing guzdebook, trade dimensions, stamford, ct, 1995. 282 proceedings of the 29th annual hawaii international conference on system sciences - 1996 although companies examined lead industry in both processes and channel relationship innovation, each these case sites has idiosyncratic relationships with wide range suppliers or customers within grocery channel. this sample provides opportunity to examine technology-mediated from perspective innovation leaders. were then revised released by senior officer company for use research teaching at harvard business school other schools. telephone survey nineteen executives supplemented seven !studies, providing additional insight into generalizability findings. was conducted selected chosen those retailers listed guidebook [28]. phone one part broader written retailers, described detail clark [15]. 109 whom surveys distributed, twenty-six returned coinpleted surveys, agreed participate one-hour interviews supplement data collection. design formed assistance several experts, including academics experienced apparel industries (hoban, [29]; hammond, [301). studies used involved days visits offices, least eight managers company. interviewed included marketing, logistics, operations, information systems, general (i.e., president vice level) following initial interviews, we follow-up recommended contacts, especially when required complete study describing detail. interview findings summarized drafts, extensively reviewed original site visits. drafts 4. model figure 1. levels organizational interconnectivity i 6 5 4 3 2 1 new information-intensiveprocesses transmission electronic interchange order physical transfer connectivity expected fit an ios osi-style model, some differences unique aspects anticipated, but particular thart would arise neither anticipated nor well understood during period design. evolving nature without strong hypothesis validate, assumed discernable interorganizational emerge. 283 anecdotal evidence provided support increasing connectivity, enabling construction hierarchy relationships. provide descriptive framework are examples level interdependence. describe observed, technological advances critical driving force migration first three only, as shown process innovations emerged key factor organizations move four. policy changes shift five. sixth involves deliberate investments that surpass structured innovations. level, firms begin investing broadly, even absence well-defined short-term return investment, explore previously unidentified opportunities improving operations. seventh highest establish close based mutual trust, become willing disclose sensitive proprietary information. behave almost if there joint equity ownership channel, allying retain separate structures. transitions two levels, more complex four, adoption policies step fifth connectivity. transition comes scope interdependence shifts focus individually recognizing importance their role means improve operations fiims multiple areas. buoyed success narrow arena, strengthen through time, effort, capital across all areas interaction. extends broad top management groups creation strategic alliances between who might have regarded another rivals (croson, [34]). increased invoicing payment: automation invoice-payment illustrates application our framework. lowest most traditional invoices mailed customers, checks suppliers. faxed uncommon, payments impossible. payment systems enable migrate third using ed1 sending funds send payments. fourth similar form is also exchange pricing changes, bill-back charges, advanced shipping notices, related that, infrastructure makes transmissions automatic free,might not otherwise be shared. ordering still require human intervention essentially manual communications efficiency. proving potential benefits virtual integration sizable does automatically make such arrangements desirable, workable: risks created transforming arms-length transaction must taken account. clemons row [31] point out sharing eliminating inventory situations partner better outside alternatives, keeping analysis williamson [12] klein et al. [32]. alliance thus appropriate than 100% value gained integration; rational anticipation expropriation indicates formed, though social cost savings run billions dollars (kurt salmon associates, c331). moving implement payment. example, paid received, discount float negotiated compensation real-time any invoice disputes resolved later, charge-back dispute resolution process, disrupting day-to-day flow ordinary invoices. replacement existing requires policies. no longer aimed efficiency trust constructed nebulous psychological trust-building exercises, "cheap talk' claiming total commitment while secretly maintaining options reversion escape, undertaking irreversible actions commit parties equally irrevocably partnership. separators adjoining technology improvements 284 represent ways supporting essential activities changing transmitted. moves beyond simply capabilities transmitting faster, cheaply, accurately. example retailer warehouse (or, further refinement) retail point-of-sale suppliers, addition product orders. movement costs wholesaler little margin provide, adds significant many managing production forecasting future volumes. ordering: relies direct unusual today, smaller place orders delivery paper via u.s. mail tomorrow's back today's truck, practice common rural served wholesalers, w1. mode clearly slow labor-intensiverelative technologies, largely been replaced platform members. fax, eliminates legal contract document, omission which concerned manufacturers early adoption. declining fax speed resulted becoming dominant (mckenney, [35]) 1995, technologies themselves transmission. transmitted nonambiguous, less formal substitute transport paper-based order. placing allowing ship products needed replenish goods sold. industry, vendor-managed-inventory called continuous replenishment f'rocess (crf'). case-study indicate crp \"ordering\" only creates much greater enables dramatic (clark, [151; [361; stoddard, [37]). implementing different purely tradeoffs issues migrating up prior connectivity; mid-level functional time necessary investment decisions. 'top pyramid steps representing stage 80% survey, sites, noted usage per se did significantly increase faxing orders, reliable expensive. justified expenses associated e d primarily its ability eliminate entry reliability accuracy. advantage occasionally cited (emmelheinz, [36]). however, industries, just \"fast\" edi, fast rest can handle it. faster efficient tightly integrated orderprocessing manufacturer, bypass automated process. operation general, meetings discussions firms' representatives focused specifically seeking eliminatinj, invest absent anticipating effectiveness identified advance will arise. relationship-building stage, perception adjacent occupants partners, often emerges concurrently levell enthusiastically supported developing type exploratory wt partners. few ih change coordination specific paybacks j 285 could demonstrated, unwilling extend operational unproven viewed necessity [3] compete, remained collaborative relationship, viewing distributive negotiating (fisher al., [39]). discover improvement, rather enabler single improvement crp. hannaford important sources competitive actively invested stronger linkages develop \"joint optimization relationships\" (jor) vendors. twelve had committed jor late 1994, t r partners considered he p&g campbell differing partnerships ten meeting characteristics either manufacturer. fewer forty twenty-five offered moved prepare test capabilities, proved manufacturer control over determining quantities real barrier; afterthought. problems innovations, reluctant due requisite dependence remain stuck hope advancement. cross-firm traditionally very (e.g.. costs, margins, plans introduction). limited availability attention combine constrain number highest-level firm maintain. heb, implemented (ed1 ordering) vendors supplying 96% products, achieved 50% volume (fifth level). heb skipped entirely because they supply sales solely shared fifty firms, fifteen twenty accurately six relationships, favored evolved forming heb. indicated unable heavy load n imposed formation maintenance. wholesalers particularly processes, renegotiating terms maintain wholesale removed profit sustained under participating leaders publicly adopting crp, difficulty slowly survive transition. working alternative shipment them realize \"inside margins\" procurement pre-negotiated plan distributing gains improved saw limitation development front-line (rather toplevel executives) productivity relationship. hi33 led penetration, vehicle enter mutually beneficial interdependent market leadership position continued reductions furthermore continual ongoing 286 efficiency, feared arbitrage economic inefficiencies profits. again, barrier fundamental take so, wholesaler, w3, manufacturers, customers. w3 pursued strategy aggressively marketed services large chains outsourcer, way accomplishing distribution functions provided, own services, cost-efficient doing so w3. acting as, effect, in-house arm developed extensive attention, limits comprised serious limitations revenue growth. high interdependency helped grow substantially. s. conclusions imglications manaperial evolution cooperation possible, evolve repeated imultir player environment where substantial \"defection\" negotiations (axelrod, [40]). demands managerial significant, create natural limit simultaneouslysustained industry. leading effective later. thus, blenefits may prove sustainable 6. ogportunities extentding. datal generalizable acrolss contexts. apparel, hardware, health care, components, auto parts mass merchandisers face inventories myriad skus scores applicability non-us contexts anti-trust regulations restrictive. manufacturexs study, afford applies extended include relationshipsbetween \"store door delivery\" rewards successfhlly achieving higher cannot risk decisions avoided delayed stages upon standards agreement established before realized. establishing difficult achieve imbalance power it possible binding commitments voluntarily made bargaining position. outcome clear recognition firms. validated larger empirical focusing classifying relatilonships exploring levels. cross-industry useful what drives e.g. concentration, competitiveness, profitability, etc. later performance measures statistically performance. spite intense price 287 i996 references badaracco, j. l. 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[35] j.l.. waves change. schiano, \"hannaford brothers: transformation.\" 9-195-127, [36]emmelhainz, edz: guide. nostrand reinhold, wang, seidmann, v. interchange: externalities implementation policies.\" science. 41:3, (march), 401-418. 289 u sto ry h-e-b challenge solution benefit simplify messaging administration support; e-mail system; expand service features standardize software hardware throughout intel xeon processor mp-based dell poweredge servers running microsoft server 2003 streamlined expanded communication capabilities; seamless office applications; scalable easily growth outlook software; employ best practices help ensure smooth installation expandability express lane team standardized h-e-b, innovative texas hroughout mexico, rec- ognized household name complicated prompts drive well-established operates 300 stores until recently, approximately 20,000 employees 150 communities employee base nearly applications, creating maintenance quagmire 56,000. since 1999, forbes 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