The impact of web-based e-commerce on channel strategy in the agricultural sector

ABSTRACT

Over the past decade, no other medium has changed our current lifestyle or the way we conduct business more than the emergence of the internet since the invention of television. The Internet enables firms and companies to do business on a more advanced level. Now it is possible to shorten distances even further, enhance the ability to communicate and transact across geographical boundaries and thereby reduce or eliminate transaction costs. Since the internet already represents a new infrastructure, it has a strong impact on business organizations. The importance of web-based distribution channels has rapidly surged and web-based distribution channels have become an integral part of the channel strategy of businesses across the globe. Transactions like buying, selling, delivering or contracting seem to be potential incentives for a conversion to e-commerce.

The following three factors: (1) industry structure, (2) product complexity, and (3) the complex nature of business processes within the firm, play a crucial role when it comes to e-commerce in the agricultural sector. The main objective of this paper is to analyze these dominant factors in order to find out in what ways web-based e-commerce is affecting the channel strategy in the agricultural business. At first, the paper will give a short literature review in which the most important terms will be defined. Second, the role of distribution channels will be discussed in order to develop an understanding of how important the channel selection decision is. Third, the channel strategy of web-based e-commerce and its potential benefits will be illustrated. The fourth chapter analyses the three dominant factors that have an impact on the adoption of web-based e-commerce in the agricultural sector. Finally, in the fifth chapter, based on the preceding chapters, the strategic implications for agribusinesses will be drawn. A conclusion will bring this paper to an end.

KEY WORDS

E-commerce, distribution channels, agribusiness, e-agribusiness

INTRODUCTION

The Internet provides new opportunities and challenges for industries in today’s world. The Internet represents the latest information network which further shortens distances, enhances the ability to communicate and transact across geographical boundaries and thereby reduces or eliminates transaction costs. Representing a new infrastructure, the Internet already has a strong impact on business organizations: Web-based distribution channels are rapidly becoming an integral part of the channel strategy of businesses across the globe. In the agricultural business, like in any other business, there are common agribusiness transactions such as buying, selling, delivering or contracting that seem to be potential targets for a conversion to e-commerce.

Three dominant factors have mainly impacted this development: (1) industry structure, (2) product complexity, and (3) the complex nature of business processes within the firm. This paper will analyze these dominant factors in order to find out in what ways web-based e-commerce is affecting the channel strategy in the agricultural business. At first, the paper will give a short literature review in which the most important terms will be defined. Second, the role of distribution channels will be discussed in order to develop an understanding of how important the channel selection decision is. Third, the channel strategy of web-based e-commerce and its potential benefits will be illustrated. The fourth chapter analyses the three dominant factors that have an impact on the adoption of web-based e-commerce in the agricultural sector. Finally, in the fifth chapter, based on the preceding chapters, the strategic implications for agribusinesses will be drawn. Last but not least, a conclusion will bring the paper to a round figure.

MATERIAL AND METHODS

Decent and useable literature on this topic, especially for e-commerce in the agricultural sector, is difficult to find, since for most agricultural firms as well as for academic writers this topic has only gained importance recently. Additionally, e-commerce is a constantly changing market, new technology could change the market significantly and thus the literature could become outdated very quickly. Due to that fact, the literature of only a few years back is not seldom in conflict with today’s academic writings. Likewise, literature cannot be converted easily from one country to another, e.g. U.S. or the Europe, due to the significant market characteristics of each country. Most of the data and knowledge in this paper were gained out of scientific retail and food retail journals as well as books on this topic.

RESULTS AND DISCUSSION

1. Literature Review

1.1 Agricultural Marketing

In this paper, agricultural marketing refers to “activities of the market purporting to facilitate and expedite the disposal of agro and agro-based products” (Prasad, 1995, p. 19). Agricultural marketing encompasses all services involved in moving an agricultural product from the farmer to the end-consumer, such as production planning, growing and harvesting, packing, transport, storage, processing, distribution, advertising and sale. In some definitions, even the acts of buying supplies, renting equipment and hiring labor are included, arguing that marketing refers to all activities a business does. However, in this paper, these external factors will not be included.

In this context, the concept of agribusiness needs to be explained. The concept encompasses all activities named above, from agro input manufacturing to marketing of the processed food to the final consumer. Hence, with “agribusinesses” or “companies in the agribusiness”, this paper refers to any business in the agricultural and food channel.

Over the last decades, the costs attributed to producing, i.e. farming and growing, have declined whereas the costs attributed to agricultural marketing, i.e. distribution and promotion, have risen. Hence, the selected channel of distribution must produce a proper mix of sales volume and costs which yield the maximum amount of profit. However, due to a number of reasons, which are going to be mentioned in chapter 4.1, the traditional manufacturers of agro and agro-based products are struggling hard to defend their position in the distribution channel.

1.2 Web-Based E-Commerce

E-commerce can be interpreted as a subset of e-business. The term e-business describes the support of communication and business processes through information and communication technologies (ICT), that are used in an integrative way based on the cultural and organizational rules of the economy’s network. E-business comprises the whole range of business activities performed online and is thus not limited to internet-based sales or purchases. E-commerce can be defined as a subarea of e-business and is concentrated on the electronic sale. Hence, doing e-commerce involves also e-business activities, in order to conduct an e-commerce business successfully (Henderson, et al., 2004, pp. 505-506).

Most definitions are based on the assumption that e-commerce developed due to the expansion of electronic media, such as the Internet. However, most definitions do not clearly define in how far other electronic media like smart phones, telephones or television are included. Considering this, the very simple definition of e-commerce by the European Commission as “doing business electronically” (European Commission, 1997, p. 2) appears to be too broad and interpretable. In contrast, Kotler’s definition of e-commerce is more focused. He defines e-commerce as “offers to transact or facilitate the selling of products and services online” (Kotler, et al., 2009, p. 863). Kotler’s definition is clearly focused on the internet as means of trade, as he defines e-commerce as “offer to transact […] online.” The participants communicate with each other electronically, rather than by direct physical contact. This paper will use the term e-commerce in a more narrow sense, according to the definition of Kotler.

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