Business Process Digitization

Journal of Business Venturing 18 (2003) 789 – 814
Business process digitization, strategy,

and the impact of firm age and size:
the case of the magazine publishing industry
Anat BarNira,*, John M. Gallaugherb,1, Pat Augerc,2
a
Department of Management, College of Business Administration, University of North Texas,
Denton, TX 76203, USA
b
Department of Operations and Strategic Management, Wallace E. Carroll School of Management,
Boston College, Chestnut Hill, MA 02467, USA
c
Melbourne Business School, Carlton, Victoria 3053, Australia
Received 28 February 2000; accepted 31 May 2002
Abstract
Despite increasing interest among researchers and practitioners in the field of Internet commerce,
significant controversy remains regarding the large incumbent versus nimble newcomer dynamic. This
paper explores issues related to firm age and size and the firm’s propensity to engage in Internet-
enabled process digitization by conducting an empirical investigation based on a sample of 150 firms
in the magazine publishing industry. Results suggest that (a) differences exist as a function of firm age
and size in the degree and manner in which firms digitize business processes through the Internet, (b)
Internet-enabled digitization of business processes is associated with both strategies of innovation and
of low cost, and (c) the digitization – strategy relationship is stronger for new versus established firms
and for smaller versus larger firms.
D 2003 Elsevier Science Inc. All rights reserved.
* Corresponding author. Tel.: +1-940-565-4334.

E-mail addresses: barnira@unt.edu (A. BarNir), John.gallaugher@bc.edu (J.M. Gallaugher),
p.auger@mbs.edu (P. Auger).
1
Tel.: +1-617-552-2519.
2
Tel.: +61-3-9349-8194.
0883-9026/03/$ – see front matter D 2003 Elsevier Science Inc. All rights reserved.
doi:10.1016/S0883-9026(03)00030-2
790 A. BarNir et al. / Journal of Business Venturing 18 (2003) 789–814
1. Executive summary
The dramatic growth in the number of firms that use the Internet to conduct business
prompts many questions regarding the nature of this activity. Of special interest is the
question: Which firms are more likely to choose this mode of operation, and why? The
present paper examines the relationship between the extent to which firms utilize the Internet
to conduct business—which we refer to as digitizing business processes—and the firm’s age,
size, and strategic orientation.
This paper focuses on the digitization of business processes, which denotes the transition
from conducting business activities in a traditional manner to conducting them in a digital
form. It is argued that the resources provided through the Internet, although available to all
firms, often require unique capabilities that exist in some firms more than in others and
provide benefits that are more important to some firms than to others. The age and size of the
firm may reflect the existence or absence of those capabilities. As such, age and size could
become a liability (or an asset) in attempts to leverage Internet resources. Thus, the first issue
addressed by the present investigation concerns the relationship between firm age and size
and the extent to which firms digitize business processes. We draw on existing management
literature to hypothesize that characteristics of established and larger firms may get in the way
of utilizing Internet resources, resulting in more digitization of business processes among
newer and smaller firms. This work further argues that a positive relationship exists between
the extent to which a firm is inclined to digitize business processes and its strategic
orientation. Specifically, it is suggested that the degree to which a firm digitizes business
processes contributes to and facilitates its overall efforts to innovate or to pursue internal
efficiencies and control costs. Finally, we also suggest that the digitization – strategy
relationship is moderated by the firm’s age and size such that the relationship will be
stronger in new and small firms compared with established and large ones.
We focus on an industry in which the potential exists for online growth and products have
the potential to be fully digitized, where process digitization through the Internet could
benefit the expansion of markets as well as internal business efficiencies and where a
significant number of firms exist that have already adopted online activity. We thus selected
the magazine publishing industry and base our analyses on mail and online responses of 150
magazine publishers.
Findings suggest that the degree to which firms digitize business processes does vary as a
function of firm age and size. We found that established firms digitize activities associated
with marketing, administration, and communication more than newer firms and that larger
firms digitize marketing activities more than smaller firms. Results also indicate that process
digitization predicts the strategic orientation of innovation and the strategic orientation of low
cost, explaining 12% and 8% of the variance, respectively. Our results further suggest that the
relationship between digitization and innovation efforts are stronger in newer firms than in
established firms and that the relationship between digitization and low cost efforts are
stronger for smaller firms than for larger firms. Specifically, digitization variables account for
22% of innovation variance in newer firms compared with 10% in established firms and for
15% of the low cost strategy variance in smaller firms compared with 4% in larger firms.
A. BarNir et al. / Journal of Business Venturing 18 (2003) 789–814 791
Several implications emerge from the present investigation. First, firms may—and indeed
appear to—use the Internet in a systematic fashion to support strategic objectives. This
suggests that the Internet consists of resources that link to strategy and that leveraging those
resources facilitates the execution of strategy. In the digital era, having the ability to capitalize
on electronic and Internet resources may be a source of competitive advantage. Second, it
appears that the most common use of the Internet is associated with digitizing information
gathering activities. Given that the usefulness of the Internet has been argued to be in many
forms that lead to cost savings and efficiencies, it thus seems that the full potential of
conducting business electronically is not appreciated by a large number of competitors in the
industry that we studied. Third, our analyses consistently show a negative relationship
between strategic orientation (toward both innovation and low cost) and digitization of
marketing activities. This finding is unexpected and may suggest that firms that extensively
use online processes for marketing, sales, or customer support tend to do so in lieu of
developing a focused strategy. That is, it may be that firms perceive online marketing-related
activities as a strategy in itself, possibly substituting the need to develop and focus on a clear
strategic direction. Clearly, this is one of the surprising findings that warrant further study.
This work examines the nature of shifting business processes to the digital domain. A major
challenge for management researchers is to see whether the theories and explanations stand the
test of reality and whether they can be used to shed light on and increase our understanding of
daily business events. Given the relative newness of the Internet, there has been a noted lack of
empirical work examining the Internet from a strategy perspective. It is hoped that the present
empirical study will help to illuminate issues related to classical and contemporary manage-
ment theory with respect to the digital business environment, that these findings prove useful as
new methods for electronic commerce (e-commerce) create related process-shifting oppor-
tunities for incumbents and startups, and that the findings will inspire and challenge others to
investigate new phenomena in a manner that synthesizes existing theories of management,
strategy, and competition and offers relevance to both researchers and practitioners.
2. Introduction
The dramatic increase in the scope of business-related activity that is conducted through
the Internet commands a prominent place in the headlines of the popular press. The growth is
indeed impressive. The number of Internet users worldwide grew from roughly 25 million in
1995 to over half a billion by mid-year 2001 (Nua, 2001), and the scope of Internet retail
revenues, tallied at US$7.8 billion in 1998, is expected to reach US$108 billion in 2003
(McQuilvey, 1998). This impressive growth has generated significant interest among business
researchers. Academic work on the Internet first appeared in the mid-1990s, primarily
focusing on the Internet phenomenon from communication, marketing, and information
technology perspectives (e.g., Hoffman and Novak, 1996; Nouwens and Bouwman, 1995;
Steinfield et al., 1995). Additional work has emphasized the economic-strategic perspective,
focusing on the impact of this new medium on industry structure, profit distribution in the
value chain and transaction costs (e.g., Bakos, 1998; Bakos and Brynjolfsson, 1999;
Benjamin and Wigand, 1995; Sarkar et al., 1995; Venkatraman, 2000). However, the majority
of the work has been theoretical or conceptual in nature.
Given the relative newness and the broad impact of the Internet, there is an acute need for
empirical research on the nature and scope of Internet business activity, particularly regarding
managerial and competitive implications. The present investigation targets this gap, focusing
on two objectives. First, this work explores what we believe to be one of the more interesting
and controversial issues of e-commerce competition—the large incumbent versus nimble
newcomer dynamic. Drawing on existing theory, several related hypotheses are developed
and empirically tested that examine the relationship between a firm’s age and size and its use
of the Internet to conduct business activities. Second, this work explores classical manage-
ment theory within the context of the Internet economy by examining the extent to which a
systematic relationship can be found between the degree of Internet utilization and a firm’s
strategic orientation, further considering the moderating role of the firm’s age and size.
In the presented work, the term process digitization is used to denote the transition from
conducting business activities in a traditional manner to conducting them in a digital form. This
transformation reflects the shift from atoms to bits (Negroponte, 1995) and is consistent with
the notion of digitization as ‘‘a disruptive, creative force that is revolutionizing how people
work, play, communicate, buy, sell, and live’’ (Slywotzky and Morrison, 2000, p. 7).
Slywotzky and Morrison (2000) coined the term digital business design as the new way in
which a firm can capitalize on strategic options available through digital technologies,
suggesting that organizations that are able to incorporate digital technologies into their business
models will be better able to increase margins and establish competitive advantage. This paper
focuses on several aspects of the digitization process to study whether the extent to which
conducting business activities online is associated with specific firm or strategy characteristics.
The paper is structured in the following way. First, the construct of business process
digitization is introduced and then followed by an overview of the literature regarding the
possible implications of firm age and size for digitizing and utilizing online options. The next
section examines the relationship between digitization and strategic orientation. The discus-
sion of the literature allows for the development of a series of theory-based hypotheses, which
are subsequently empirically tested. The research methods are then detailed, followed by a
presentation and discussion of the results.
3. Digitization of business processes
The term e-commerce is commonly used in reference to the utilization of the Internet and
related infrastructures to support commercial activities. As such, e-commerce is an inclusive
term, reflecting a spectrum of activities that may include tasks such as gathering of
competitive intelligence, using e-mail, and conducting commercial transactions online. This
inclusive view of e-commerce is consistent with the definition introduced by Wigand (1997)
who referred to e-commerce as the incorporation of technology that encompasses all stages in
the business process. This study is concerned specifically with how firms use the Internet to
conduct business activities and focuses on firms that digitize their processes by shifting their
activities—in part or in full—to an electronic environment. Some examples of process

digitization include using the Internet to conduct marketing or sales activities, to do
competitive benchmarking or gather information, to communicate within and outside the
organization, or to conduct or support administrative tasks such as purchasing or distribution.
3.1. The value of business digitization
We argue that digitization is associated with the development of new capabilities that lead
to a variety of benefits. These benefits may facilitate both competitive positioning and pursuit
of strategic objectives and are associated with identifying and capitalizing on what Feeny
(2001) referred to as e-opportunities. We group these benefits into three major categories:
information gathering, efficiency enhancement, and customer focus. First, as a means to
obtain information, the Internet is an effective and relatively inexpensive tool for scanning the
environment or researching markets and competitors (Hoffman et al., 1995). The Internet
facilitates the identification of opportunities and allows the gathering of large amounts of
information with a level of precision not available in offline environments (Cronin, 1994;
Shapiro and Varian, 1998). Second, online business activity has the potential to provide
benefits from cost savings due to lower transaction costs (Auger and Gallaugher, 1997;
Benjamin and Wigand, 1995; Nouwens and Bouwman, 1995). These cost savings are
attributed to (a) lower error rates in transaction processing (Auger and Gallaugher, 1997;
Hoffman et al., 1995; Wilder, 1995) and (b) lower procedural and bureaucratic costs of
purchasing, sales, service, or other administrative tasks that often accompany interaction with
suppliers and customers (Benjamin and Wigand, 1995). Third, the customer focus benefits of
the Internet are associated with the ease and simplicity with which customer interaction can
occur online as well as with the richness and comprehensiveness of information that can be
communicated. Specifically, the Internet is a medium that facilitates activities such as sales
and customer support by opening channels of communication to and from the company
(Hoffman and Novak, 1996). In such a manner, the Internet enables the firm to inexpensively
obtain ongoing feedback and customer information and incorporate it into operations,
personalize and customize consumer experience, and quickly and effectively respond to
customers (Auger and Gallaugher, 1997; Cuneo, 1995).
4. Firm age, size, and process digitization
The management literature identifies age and size as two firm characteristics that have
implications for competitive practices and that bear on many of the factors that influence the
manner in which business is conducted. For example, firm age is perceived as an indication of
external legitimacy, of the existence of interfirm relationships, of staying power, or of the
pervasiveness of internal routines (Fichman and Kemerer, 1993; Kalyanaram and Wittink,
1994). Firm size has often been associated with the extent of the firm’s resources, with the
existence of internal procedures such as formalization, controls, or decision-making pro-
cesses, with market presence and related network effects, and with competitive strength (e.g.,
Aldrich and Auster, 1986; Stinchcombe, 1965). Our first objective in this paper is to
investigate the relationship between firm age and size and the extent to which the firm
transitions to utilizing the Internet for conducting business activities. We specifically focus on
whether characteristics typical to new and small firms facilitate these firms’ ability to utilize
the resources available in the digital era.3
The age and size of the firm, because of their relevance to both external relationships and
internal arrangements, have direct implications for competitive practices. Two streams in the
management literature are of particular relevance to this issue. The first is the literature
focusing on liabilities of newness and smallness. The notion of liability of newness (and its
extension—the liability of smallness) has been introduced in reference to the difficulties
facing new—compared with established—firms (Aldrich and Auster, 1986; Stinchcombe,
1965). Discussed from population and organizational perspectives, it has been argued that the
internal routines and interfirm arrangements that characterize established and large firms lead
to the selection of those firms and to a higher mortality rate of new and small firms (e.g.,
Aldrich and Auster, 1986). Liabilities of new and small firms include lack of market
recognition and economies of scale, lack of alliances with partners that may be able to
secure the resources needed for establishing market position, or weak financial position. New
and small firms also suffer disadvantages in terms of competition for labor force or the lack of
internal structures that offer clearly defined roles, internal control and organization, and a
general ability to operate and organize efficiently.
The vulnerability of new and small firms does not only stem from intrinsic weaknesses but
also from the strength of established and large competitors (Aldrich and Auster, 1986; Singh
et al., 1986). To the extent that established and large firms have significant competitive
strengths in terms of available resources, managerial knowledge, and ability to handle
uncertainty, they pose a threat to the new and small firms. Further, larger organizations often
have external relationships and contacts, reputation, and a market position, which facilitate
further transactions and relationships. The market position and the relationships of established
and large firms expose them to new competitive tools, technologies, and ways of doing
business, which makes the incorporation of such innovative tools easier. Additionally, the
resources and internal strengths of established and large firms may facilitate the acquisition of
new technologies or other required features needed to implement new methods in the firm.
Another view is addressed in the literature on organizational change. The organizational
change perspective views organizations as stable entities in which internal processes develop
that perpetuate existing routines and structures (e.g., Hannan and Freeman, 1984). According
to this perspective, not only does organizational inertia constrain the organization’s ability to
change but also core organizational functions such as goals, technology, or marketing are the
ones least likely to change (Baum, 1996; Hannan and Freeman, 1984). An important aspect of
this theory is that the inertial pressures increase with age and size. Specifically, as
3
It’s important to emphasize that our study deals with the extent to which age and size moderate a firm’s
inclination to digitize processes. As such, we do not focus on so called pure-play firms that have always existed
online. Rather, we examine firms of varying age and size that have offline operations and which may choose to
digitize these activities.
organizations age, internal processes and routines formalize, power structure institutionalizes,
and relationships and communication patterns become embedded, all of which increase
organizational rigidity and may reduce the likelihood of adaptation and change.
From the organizational change perspective, the characteristics of established and large
firms also lead to internal processes that interfere with the adoption of new technologies, and to
the extent that adaptation to change becomes a strategic necessity, older age and larger size
may be considered a liability. Accordingly, the liability of aging hypotheses (Barron et al.,
1994; Baum, 1996) suggest that processes occurring later in the organization’s life, such as
depletion of resources, established internal routines, formalization of processes, or managerial
mindset and dominant logic, get in the way of the organization’s ability to accommodate
external changes. Thus, from this perspective, the characteristics of established and large firms
may hinder implementing the changes associated with the digitization of business processes.4
In order to determine the overall impact of age and size on the firm’s adoption of process
digitization, one has to reflect again on the nature of digitization. We argue that digitization is
essentially a change process that involves the adoption of new technologies and their
application in the firm. Technology adoption may be referred to as a ‘‘. . . structuration process
by which tasks and people in an organization change. . .’’ (Roberts and Grabowski, 1996, p.
409) and is a dynamic process of social and political changes that involve negotiation, power
struggles, and compromises among different interests and players (Clausen and Koch, 1999).
Further, the process of adopting new technologies is typically targeted at institutionalizing the
implementation of these technologies in the firm and has been associated with a variety of
facilitating and inhibitory attitudes and behaviors at the individual and organizational levels
(e.g., Brancheau and Wetherbe, 1990; Burkhardt and Brass, 1990; Cooper and Zmud, 1990;
Karahanna et al., 1999). Based on the organizational change perspective, we develop the
hypotheses to reflect the expected relationship between digitization and firm age and size.
Hypothesis 1a: Established firms are less likely to digitize business processes through the
Internet than newer firms.
Hypothesis 1b: Larger firms are less likely to digitize business processes through the Internet
than smaller firms.
5. Business strategy and process digitization
Strategic positioning that leads to competitive advantage can be achieved when a firm
focuses on and conducts specific sets of activities that promote the direction it seeks, resulting
4
Interestingly, the relative ease of change in new or small organizations has originally been associated with
these firms’ liabilities because change was perceived to be indicative of weak internal mechanisms and lack of
established routines, which made firms vulnerable. This perspective is different from the position that emerged
later and taken in this study, which is that the ability to change is often a strategic necessity and may be more a
strength than a weakness.
in superior performance relative to competitors (Porter, 1990, 1996). Two types of

orientations that often reflect a firm’s overall direction in terms of its activities and internal
processes are innovation orientation and low cost/efficiency orientation. These orientations
capture two general issues of concern to the firm: (a) how to increase the uniqueness of its
products to make them more attractive relative to competitors and (b) how to increase internal
efficiencies and provide the company’s offerings at competitive prices. Accordingly, our
second objective in this paper is to explore the relationship between digitization of business
processes and competitive strategy.
We propose that digitization of business processes is one of the factors that contribute to
the execution of strategic efforts aimed at achieving innovativeness and low costs. Being that
digitization involves both the incorporation of new technology into the organization and the
integration of this new technology with existing processes, it may be viewed as both a product
and a process (Orlikowski, 1992; Roberts and Grabowski, 1996; Weick, 1990) and may be
driving strategy as well as driven by it. Our approach is based on this view, suggesting that
transforming business processes from traditional to digital leads to a change in the firm’s
overall procedures and capabilities and that this change will facilitate the firm’s efforts to (a)
introduce new products or offerings and (b) improve efficiencies and cost savings.
5.1. Innovation orientation
Innovation orientation bears on a firm’s overall efforts to reinvent and redesign offerings,
experiment with new technologies, and introduce new products or processes. Such orientation
reflects a proactive search for and recognition of opportunities, attempts to enhance or refine
existing products, an emphasis on developing abilities leading to successful commercializa-
tion of new offerings, and a general commitment to developing and marketing new products
(Afuah, 1998; Li and Atuahene-Gima, 2001; Roberts, 1988; Zahra and Covin, 1993).
A firm’s orientation toward innovation will be facilitated by the existence of Internet-based
capabilities because those capabilities enhance two important components of innovation:
openness to new ideas and capacity to innovate (Berthon et al., 1999; Burns and Stalker,
1966; Zaltman et al., 1973). Several factors support the notion that a positive relationship
exists between digitization of business processes and innovation. First, Internet-based
activities provide benefits that are particularly useful for innovative firms. These benefits,
which include easy information gathering and improved communication, facilitate the pursuit
of innovation by making environmental scanning, competitive analysis, and external
feedback more accessible. Second, the reach of the Internet enables exposure to large
audiences (Evans and Wurster, 2000), which increases the likelihood of success when
introducing new offerings, content, or services. Further, the success of innovation is often
a function of renewed emphasis on differentiation and customer exposure to the new features
or offerings (Feeny, 2001), exposure that is likely to be enhanced by the reach of the Internet
and the richness of the information communicated through it. Third, Internet-based tech-
nologies, by simplifying marketing, communication, and customer-related activities, allow for
quick feedback and encourage experimentation, which is likely to have a positive impact on
innovation. Fourth, Internet-based technologies that focus on communication, administration,
or customer feedback also facilitate the emergence and diffusion of new ideas from managers,
employees, or customers (Afuah, 1998; Von Hippel, 1978, 1988). Therefore, the impact of
Internet-related capabilities may be manifested in an improved ability to seek new customers,
identify new opportunities, and a generally more effective way of pursuing innovation.
Hypothesis 2: The extent of process digitization will be positively related to the firm’s
innovation orientation.
5.2. Efficiency orientation
Another way in which firms may establish a defensible strategic position is by pursuing
internal efficiencies and low costs (Porter, 1990). Cost advantages enable a firm to have
higher margins than competitors, to underprice competitors, or to deter potential entrants due
to entry barriers associated with economies of scale. Cost advantages are often an outcome of
internal processes associated with obtaining resources, managing capabilities, or efficient
value chain management. A variety of activities can lead to cost advantages, among them are
efficiencies due to information and market knowledge, cost savings in distribution and
purchasing, or efficiencies associated with production and quality control. An efficiency
orientation also involves awareness of both customer expectations (in terms of price and
quality) and competitor actions and offerings, enabling the firm to develop price differenti-
ation and engage in aggressive and responsive pricing (Mintzberg, 1988).
Several arguments support the notion that developing digital business processes will be
associated with internal efficiencies. First, a primary outcome of digitization and Internet-
related capabilities is reducing information asymmetry by increasing the scope and richness
of information available to users. This facilitates overall cost control and internal efficiencies
due to improved knowledge of competitors’ cost structure, pricing practices, products, and
strategies. Second, Internet-based capabilities reduce transaction costs. Such capabilities
lower costs of doing business by facilitating coordination, contracting, and control of
procedures and arrangements (Smith and Brynjolfsson, 2000; Tapscott et al., 2000), which
is of benefit to those firms that try to increase efficiencies. Third, Internet-based capabilities
not only reduce sellers’ costs but also aid in managing multiple prices and make it less costly
to offer products at discriminatory prices (Dewan et al., 2000). Finally, Internet-based
technologies often improve manufacturing flexibility and automation of administrative
processes, lower time to market, and may even facilitate reengineering or improvements in
general cost structure (Dewan et al., 2000; Feeny, 2001).
Hypothesis 3: The extent of process digitization will be positively related to the firm’s
efficiency orientation.
5.3. Effects of age and size on the digitization–strategy relationship
In Hypotheses 2 and 3, we argued that a positive relationship exists between the inclination
of a firm to digitize business processes and its strategic orientation. In the following section,
we suggest that these effects will be stronger in new and small firms compared with
established and large ones. That is, we propose that the unique contribution and importance of
digitization to specific strategic efforts will be more substantial in new and smaller firms. This
is so for two main reasons. First, due to the liabilities of newness and smallness, new and
small firms with a strong strategic direction (to innovate or to control costs) are likely to be
more aware of and sensitive to their vulnerabilities in the marketplace compared with
established and large firms with similar strategic direction. Specifically, to the extent that
factors critical to the execution of strategic efforts such as tracking competitors, obtaining
customer responses and market information, or seeking technologies or partnerships to
support innovation or efficiencies are more of a challenge to new or small firms, these firms
could greatly benefit from Internet-related capabilities that facilitate those critical activities.
Thus, innovative Internet-related capabilities could substitute or compensate for age and size
vulnerabilities, will likely support and enhance strategic efforts, and could provide substantial
benefits especially to new or small firms that lack resources, experience, market presence, or
relationships needed for implementing their strategy.
Second, smaller enterprises possess specific attributes that distinguish them from large
organizations, attributes that those firms could capitalize on when faced with adverse
competitive conditions. Some of those attributes may, at times, facilitate the use of the
Internet (Downes and Mui, 1995). For example, the lack of rigid structures and complex
decision-making procedures facilitate rapid decision-making and bold marketing and opera-
tional moves. In addition, the lack of established political alliances, which constitutes a
liability in terms of securing resources and positions, also means that fewer obstacles exist in
terms of establishing partnerships or adopting new processes. Thus, the fact that new and
small organizations may have specific advantages compared with established and large
organizations because of their greater flexibility (Crawford and Ibrahim, 1985), their quick-
ness in implementing decisions, and their capacity for adaptation and mindset that encourages
experimentation (Christensen, 1995; Julian and Lafrance, 1983) may enhance their tendency
to exploit Internet resources to compensate for weaknesses that interfere with efforts to pursue
their strategic objectives.
Hypothesis 4a: The relationship between business process digitization and firm’s strategic
orientation will be stronger in newer firms than in established firms.
Hypothesis 4b: The relationship between business process digitization and firm’s strategic
orientation will be stronger in smaller firms than in larger firms.
6. Methods
6.1. Procedure and sample
This investigation is part of a larger effort to study competitive practices in small and mid-
sized firms. Our interest was in studying the behavior of firms in an industry that has
businesses that operate solely in an electronic environment, both in electronic and in

traditional environments, and only in a traditional environment. Further, we wanted to focus
on an industry where the potential existed for online expansion and where an Internet
presence could potentially benefit both market growth and internal efficiencies, an industry in
which the products have the potential to be fully digitized, and an industry that already had a
significant number of firms that have adopted online activities. Our strategy was to focus on a
single industry, despite the limitations on generalizability, because such a strategy allowed us
to concentrate on the effects of our variables of interest while minimizing the variability that
is due to different industry contexts (Dess et al., 1990; Ginsberg and Venkatraman, 1985;
Rumelt, 1991). We thus selected the magazine publishing industry, targeting the editor in
each magazine as the primary respondent.
A list of all registered magazine publishing businesses (SIC 2721) in the northeast United
States was obtained from Harris InfoSource. Approximately 75% of the firms had an
independent corporate Web site, and we offered our respondents both traditional mail surveys
and Web-based surveys for data collection. Our data collection procedure followed the
methodology used by Pearce and Zahra (1991) and consisted of a two-stage mailing
procedure. The first mailing, to a total of 1040 firms (the entire population), consisted of an
introductory letter describing the study and a reply postcard, which the recipients were asked to
mail to us if they declined to participate due to the existence of company or personal policy
against participation in studies. Consequently, 60 firms were dropped from the sample and a
total of 980 questionnaires were mailed. Analyses are based on 150 returned and useable
questionnaires, which constitute a 15.3% response rate. This response rate is consistent with
the rate observed for mail surveys targeted at senior executives (Hambrick et al., 1993).
6.2. Measures
6.2.1. Business strategy

Two strategic orientations were measured. To gauge firms’ emphasis on low cost and on
differentiation through innovation, we used items from the scale introduced by Dess and
Davis (1984) and which has been frequently adopted in studies of strategy and competitive
behavior (e.g., Kotha et al., 1995; Kotha and Vadlamani, 1995). The scale is comprised of
Likert-type items measuring various competitive practices, and respondents are asked to
indicate the importance of each practice for the successful positioning of the firm. The low
cost/efficiency scale consisted of five items (Cronbach a=.80), as did the differentiation
through innovation scale (Cronbach a=.75).
6.2.2. Digitization of business processes

Because a comprehensive measure of digitization and Internet-based activities has not yet
been introduced, we developed the measures used here by expanding on factors used by
Auger and Gallaugher (1997). Participants were presented with a list of activities and asked to
indicate whether each activity was conducted through the use of the Internet. The activities
reflect four categories as follows: Information gathering (market/consumer research, com-
petitive benchmarking, and general information), Marketing (sales, advertising/marketing,
and customer service), Administration (purchasing, shipping/distribution, general adminis-

tration), and Communication (general e-mail, communication with customers, and commun-
ication with other stakeholders).
6.2.3. Age
Age of firms was measured as the number of years since founding, by subtracting that year
from the year of data collection (1998). The age of firms in the sample ranged from 1 to 153
years, with a median of 19, an average of 30, and S.D. of 30.5.
6.2.4. Size
Size of firms in the industry was measured by the circulation of the publication. Circulation
ranged from 220 to 65,000, with a median of 17,167, an average of 21,165, and S.D. of 17,824.
6.2.5. Control variables

Regression models included three control variables: (a) type of questionnaire (online or
mail), (2) nature of the business (for profit/not for profit), and (3) magazine type (trade or
consumer publication). Firm age and size were also entered in the regression models as
control variables.
Table 1 presents descriptive statistics and intercorrelations of study variables.
6.3. Statistical procedure
Several procedures were used to test the hypotheses. First, we used multivariate analysis to
test the relationship between process digitization and firm age and size (Hypotheses 1a and 1b)
Table 1
Intercorrelations and descriptive statistics of study variables
1 2 3 4 5 6 7 8 9 10 Mean S.D.
1 Questionnaire – 0.17 0.38
2 Business type .06 – 0.84 0.37
3 Periodical type .01 .08 – 1.40 0.49
4 Firm age (log) .01 .34 .07 – 3.00 0.93
5 Firm size (log) .05 .02 .26 .15 – 9.41 1.30
6 Digitization: .17 .05 .05 .12 .02 – 1.11 0.92
Information activities
7 Digitization: .17 .03 .11 .09 .25 .31 – 1.46 1.13
Marketing activities
8 Digitization: .21 .07 .04 .14 .02 .21 .22 – 0.31 0.61
Administration activities
9 Digitization: .11 .16 .15 .11 .02 .32 .30 .20 – 1.39 0.67
Communication activities
10 Innovation strategy .05 .10 .06 .19 .12 .24 .02 .11 .20 – 5.28 1.15
11 Low cost strategy .01 .02 .07 .08 .01 .20 .07 .08 .10 .55 5.00 1.18
Correlations of .17 and above are significant at .5 level, two-tailed.
N = 139.
following a procedure similar to that used by Brush and Chaganti (1998). Two separate groups
consisting of the furthest quartiles were created for firm age and for firm size, such that for age
the ‘‘newer firms’’ group was created with the first age quartile and the ‘‘established firms’’
group consisted of the upper quartile, while for size the ‘‘smaller firms’’ group comprised of the
first size quartile and the ‘‘larger firms’’ group consisted of the upper quartile. In order to
contrast the groups, these distant groups were then compared to identify differences between
them (Brush and Chaganti, 1998; Kazanjian, 1988). Second, to test the relationships between
process digitization and strategic orientation (Hypotheses 2 and 3), we used multiple
hierarchical regressions in which the control variables were entered in the first block and
explanatory variables in the second block. To test the moderating role of firm age and size
(Hypotheses 4a and 4b), two sets of regressions were used. First, interaction terms were
included in the hierarchical regression (using centered variables). Second, a median split-based
regression was used to highlight different patterns in small versus larger firms and in newer
versus established firms.
7. Results
The first two hypotheses dealt with the relationship between firm age and size and process
digitization. The hypotheses argued that established and larger firms are less likely to shift
activities to the Internet than newer and smaller firms. These hypotheses were tested using
GLM multivariate analysis procedure, which provides analysis of variance for multiple
dependent variables by factor variables. The sample was separated into groups consisting of
those firms aged 9 years or less, the newer firms group (n = 34, mean = 6.8, S.D. = 2.1), and
firms aged 39 years or more, the established firms group (n = 37, mean = 73.7, S.D. = 32.6).
Similarly, the smaller firms group consisted of those firms with circulation under 6,000 (n = 35,
mean = 2,560, S.D. = 2000), while the larger firms group consisted of firms with circulation of
34,000 or more (n = 36, mean = 47,635, S.D. = 10,583). An analysis was then performed to
compare the means among the different groups. Table 2 presents means and S.D. for the four
process digitization activities for each of the four groups of firms: newer, established, smaller,
and larger. The last column reports the univariate F’s for comparison between smaller and
larger groups and newer and established groups. Results indicate that for the size factor,
univariate F’s were significant for digitization of marketing activities ( F = 12.19, P < .01).
Results also indicate that for the age factor, univariate F was significant for digitization of
marketing, administration, and communication activities ( F = 3.50, P < .05, F = 2.69, P < .1,
and F = 3.14, P < .05, respectively). Additionally, multivariate F for size (across all four
digitization activities) was significant ( F = 3.35, P < .01) and multivariate F for age (across all
four digitization variables) was significant as well ( F = 2.87, P < .05). These results do not
support Hypothesis 1a and are in fact significant in the opposite direction, indicating that
established firms digitize their processes to a greater degree than newer firms (three of four
types of digitization activities). A similar pattern was observed with regard to the size factor
(Hypothesis 1b). Analyses yielded results that contradicted the hypothesis, suggesting that
larger firms make more use of the Internet for marketing purposes than smaller firms.
Table 2
Means and S.D. for study variables, broken down by highest and lowest quartiles of firm size and age, and
univariate F’s from GLM multivariate analysis for lowest and highest quartiles
All firms Smaller Larger Newer Established Multivariate analysis
firmsa firmsa firmsb firmsb
(n = 35) (n = 36) (n = 34) (n = 37)
Mean S.D. Mean S.D. Mean S.D. Mean S.D. Mean S.D. Sizea Ageb
univariate univariate
F F
Digitization activities
Information 1.09 0.92 1.06 0.97 1.19 0.82 1.18 0.90 0.97 0.93 0.42 0.87
Marketing 1.44 1.13 0.97 1.12 1.89 1.09 1.09 1.14 1.60 1.14 12.19* * 3.50 *
Administration 0.31 0.61 0.26 0.56 0.19 0.47 0.18 0.39 0.41 0.73 0.26 2.69y
Communication 1.37 0.67 1.46 0.66 1.50 0.61 1.21 0.85 1.51 0.61 0.08 3.14 *
Significance levels are one-tailed, two-tailed for control variables.
a
Multivariate F for digitization variables on size quartiles (smaller vs. larger firms), F = 3.35, P < .01.
b
Multivariate F for digitization variables on age quartiles (newer vs. established firms), F = 2.87, P < .05.
* P < .05.
** P < .01.
y
P < .1.
The second set of hypotheses dealt with the relationship between strategy and process
digitization. Hypotheses 2 and 3 were tested using hierarchical multiple regressions in which
the control variables were entered first, and process digitization variables were entered in the
second block.5 Results are presented in Table 3 (Models 1 and 2). These regression analyses
were also used to test Hypotheses 4a and 4b, which dealt with the interaction between age and
digitization and between size and digitization (Models 3 and 4) by entering the interaction
terms in the third block.
Hypothesis 2 stated that a positive relationship is expected between firm’s innovation
orientation and process digitization. Results provide strong support for the hypothesis. The
model (Table 3, Model 2, Innovation strategy column) is significant ( F = 3.00, P < .01).
Further, the variance in innovation explained by process digitization is 12%, which
constitutes a significant improvement over the variance explained by the control variables
( F change = 4.73, P < .001). Results show a positive relationship between innovation and
digitization of information activities and communication activities (b = 0.28, P < . 01 and
b = 0.16, P < .05, respectively) and a negative relationship with digitization of marketing
activities (b = 0.21, P < .05).
Hypothesis 3 stated that a positive relationship is expected between firm’s efficiency
orientation and process digitization. The regression model is marginally significant ( F = 1.43,
5
The arguments introduced earlier regarding the relationship between digitization and strategy suggest two
possible causal implications. The first is that strategy is driven by firm capabilities, such as digitization of business
processes. Alternatively, one may argue that strategy drives a firm to seek digital opportunities. Although this
paper does not attempt to show causal relationships, we follow the first approach in our choice of statistical
methods, given the multidimensionality of the digitization construct and the variety of benefits its uses have.
Table 3
Regression analyses: process digitization and strategic orientation
Innovation orientation Efficiency orientation
Model Model
1 2 3 4 1 2 3 4
Control variables
Questionnaire 0.06 0.10 0.09 0.10 0.01 0.03 0.02 0.03
Business type 0.05 0.04 0.07 0.07 0.05 0.06 0.01 0.05
Periodical type 0.06 0.08 0.09 0.10 0.09 0.10 0.10 0.07
Size (log) 0.08 0.12 0.13 0.11 0.05 0.01 0.01 0.00
Age (log) 0.16y 0.19 * 0.17y 0.15y 0.11 0.14 0.11 0.13
Information 0.28* * 0.28* * 0.27* * 0.24* * 0.24* * 0.23* *
Marketing 0.21 * 0.21 * 0.24* * 0.19 * 0.20 * 0.20 *
Administration 0.06 0.05 0.11 0.05 0.04 0.03
Communication 0.16 * 0.17 * 0.14y 0.08 0.09 0.08
Interactionsa
Size Information 0.11 0.15y
Size Marketing 0.01 0.03
Size Administration 0.07 0.02
Size Communication 0.01 0.03
Age Information 0.08 0.04
Age Marketing 0.21 * 0.14y
Age Administration 0.08 0.09
Age Communication 0.15y 0.14
F 1.46 3.00* * 2.19* * 2.73* * 0.43 1.43y 1.19 1.28

df 5,133 9,129 13,125 13,125 5,133 9,129 13,125 13,125
R2 .05 .17 .18 .22 .01 .09 .11 .12
DR2 .12 .01 .05 .08 .02 .03
F change 4.73** * 0.48 1.92y 2.66 * 0.68 0.93
Entries are b standardized regression coefficients.
a
Centered variables.
* P < .05.
** P < .01.
*** P < .001.
y
P < .1.
P < .1, Table 3, Model 2, Efficiency column), but the explained variance accounted for by
digitization is 8%, which marks a significant improvement over the base variance explained
by control variables ( F change = 2.66, P < .05). The analysis indicates a positive relationship
between efforts to lower costs and digitization of information activities (b = 0.24, P < .01) and
a negative relationship with digitization of marketing activities (b = 0.19, P < .05).
The last set of hypotheses focused on the impact of the firm’s age and size on the strategy–
digitization relationship. Hypotheses 4a and 4b state that stronger strategy–digitization
effects will be observed in newer and smaller firms. The interaction terms (Table 3, Models 3
and 4) provide some support for the hypotheses. With regard to innovation, the effects appear
stronger in newer firms in relation to digitization of marketing and communication processes
(b = 0.21, P < .05, b = 0.15, P < .1, respectively). These interactions constituted a 5%
improvement in explained variance, an improvement that is marginally significant
( F = 1.92, P < .1). With regard to efficiency orientation, a marginally significant effect was
observed with the interaction of size and digitization of information activities and with the
interaction of age and marketing processes. None of the interactions impacted the overall
significance of the model, and the added variance was not significant.
In order to further explore the possible impact of age and size, we supplemented our
analyses by splitting the sample into two groups of newer and established firms and smaller
and larger firms and conducting separate regression analyses for the age and size factors
(Jaccard et al., 1991). To the extent that the firm’s age and size impact the decision to digitize
business processes, one would expect different patterns in each of the sample groups. The
sample was split at the median to allow for a large enough sample size to be able to include
the relevant variables in the model. Table 4 presents results for the age factor, comparing the
Table 4
The digitization – strategy relationship in newer versus established firms
Newer firms Established firms Newer firms Established firms
Model Model Model Model
1 2 1 2 1 2 1 2
Control variables
Questionnaire 0.01 0.03 0.14 0.21y 0.04 0.09 0.04 0.12
Business type 0.01 0.04 0.15 0.16 0.05 0.02 0.11 0.11
Periodical type 0.04 0.14 0.15 0.10 0.07 0.13 0.10 0.04
Circulation (log) 0.01 0.04 0.19 0.21 0.07 0.05 0.02 0.02
Age (log) 0.10 0.10 0.03 0.01 0.05 0.03 0.01 0.05
Information 0.28 * 0.29 * 0.14 0.32 *
Marketing 0.39* * 0.01 0.27 * 0.12
Administration 0.11 0.04 0.05 0.14
Communication 0.26 * 0.04 0.20y 0.01
F 0.13 1.92 * 1.38 1.59y 0.19 0.77 0.34 1.08

df 5,63 9,59 5,64 9,60 5,63 9,59 5,64 9,60
R2 .01 .23 .09 .19 .02 .11 .03 .14
DR2 .22 .10 .09 .11
F change 4.14* * 1.76y 1.50 1.97y
* P < .05.
* * P < .01.
y
P < .1.
newer firms group (n = 76, mean age = 10.6 years, and S.D. = 4.3) and the established firms
group (n = 71, mean age = 51 years, and S.D. = 33.5). Table 5 presents results for the size
factor, comparing the smaller firms group (n = 74, mean circulation = 7,243, and S.D. = 5,193)
and the larger firms group (n = 73, mean circulation = 35,277, and S.D. = 14,688).
The median split analyses presented in Table 4 shed additional light on the effects of the
interactions presented earlier. In these analyses, we entered control variables as a first block
and process digitization as a second block for newer and for established firms. Results
indicate that the relationship between digitization and innovation orientation is stronger in
newer firms than in established firms, accounting for 22% versus 10% of the variance.
Further, whereas digitization in established firms appears to be limited to activities associated
with informational aspects, in the newer firms the effect is also due to a positive impact of
information and communication and a negative impact of marketing activities, suggesting that
a more complex association with digitization exists in newer firm than in established firms.
The analyses presented in Table 4 are also consistent with the marginal effects of the
interaction of size and digitization to predict efficiency orientation presented in Table 3 in that
not much difference appears to exist in the explained variance due to digitization in new and
Table 5
The digitization – strategy relationship in smaller versus larger firms
Smaller firms Larger firms Smaller firms Larger firms
Model Model Model Model
1 2 1 2 1 2 1 2
Control variables
Questionnaire 0.01 0.01 0.11 0.18 0.03 0.06 0.01 0.02
Business type 0.03 0.05 0.12 0.09 0.06 0.01 0.04 0.06
Periodical type 0.08 0.01 0.13 0.15 0.03 0.07 0.14 0.15
Circulation (log) 0.26y 0.25y 0.10 0.15 0.06 0.05 0.13 0.15
Age (log) 0.12 0.17 0.17 0.19 0.01 0.01 0.23y 0.26y
Information 0.39* * 0.19y 0.36* * 0.13
Marketing 0.19y 0.19y 0.27 * 0.14
Administration 0.14 0.25 * 0.06 0.09
Communication 0.20y 0.13 0.10 0.05
F 1.10 2.25 * 1.20 1.86 * 0.13 1.21 1.17 0.92

df 5,63 9,59 5,64 9,60 5,63 9,59 5,64 9,60
R2 .08 .26 .09 .22 .01 .16 .08 .12
DR2 .18 .13 .15 .04
F change 3.47* * 2.54* 2.54 * 0.64
* P < .05.
* * P < .01.
y
P < .1.
established firms (9% and 11%, respectively). Once again though, different processes are
being digitized in newer versus established firms, the primary difference being a negative
effect of digitization of marketing processes and a positive effect of communication processes
in newer firms compared with a positive effect of digitization of information processes in the
established firms. (In all these analyses, it is important to consider the magnitude of effect in
addition to the significance level, which is affected by the relatively small sample size in this
analysis).
Table 5 presents the results considering the size factor. With regard to the innovation
orientation, results did not support Hypothesis 4b, as the models are significant for both
smaller and larger firms ( F = 2.25, P < .05 and F = 1.86, P < .05, respectively) and the added
contribution in explained variance due to digitization variables is 18% and 13%, a significant
change in both smaller and larger firms ( F = 3.47, P < .05 and F = 2.54, P < .05, respectively).
The analysis is however informative in that it highlights the differences in the types of
processes being digitized in smaller versus larger firms. The primary difference is in the effect
of digitization of administration activities (b = 0.25, P < .05) observed only in the larger firms
and in digitization of communication activities (b = 0.20, P < .1), which is significant only in
smaller firms. With regard to the efficiency orientation, analyses lend some support to
Hypothesis 4b. Results from Table 3 (Model 3) show a marginal interaction effect between
size and digitization of information activities for efficiency orientation. The analyses
presented in Table 5 shed more light on this effect, indicating a significant relationship
between digitization and low cost efforts in smaller firms but not in larger firms. Smaller
firms that emphasize low cost digitize information processes to a greater extent than larger
firms and marketing processes to a lesser extent. Although the overall model is not
significant, the contribution to explained variance of the digitization variables is significant,
accounting for a noteworthy 15% of the variance in smaller firms ( F change = 2.54, P < .05).
No significant effects were observed with regard to larger firms.
8. Discussion
The focus in this investigation was on the relationship between digitization of business
processes and (a) the firm’s age and size and (b) the firm’s strategic emphasis. Findings
suggest that being established and large facilitates the digitization of business processes. Our
results also provide support for the proposition that a positive association exists between
strategic orientation and process digitization through the use of the Internet and that this
association varies as a function of firm age and size.
8.1. Process digitization and firm age and size
The first research question dealt with the relationship between digitization of business
processes and firm age and size. Our hypotheses, which were based on the organizational
change perspective, stated that established and larger firms would be less likely to capitalize on
digital options and shift business processes online. Results were significant in the opposite
direction, indicating that established firms are more likely to digitize marketing, administra-
tion, and communication processes than newer firms and that larger firms are more likely to
digitize marketing processes than smaller firms. These results are not consistent with the
organizational change perspective, which suggests that structural inertia, established routines,
and internal formalization or controls interfere with the adoption of change. Rather, the results
appear more consistent with the notion that established and large firms possess certain
characteristics (such as resources, capabilities, or relationships) that support and facilitate the
digitization of business processes and that having experience in managing roles and processes
is useful for deploying technologies needed for digitization. It may be that the experience of
the established firms is such that their managers have encountered past disruptions in processes
or technologies, have participated in past technological change processes, or have become
competent in and comfortable with organizational change processes such as digitization.
It may also be that established or large firms are motivated to digitize processes because of
the unique benefits that they expect. Established or larger firms, because of their extensive
routines, formalization, and complexity, could benefit the most from digitization that
streamlines existing processes and makes them more efficient. For example, Pfizer was able
to significantly streamline the FDA approval process for its new drugs by using Web-based
communication and documentation, and Cisco, by utilizing online ordering, was able to
significantly cut down the number of employees involved in processing each order (Hann and
Stepanek, 1999). Additionally, digitizing processes enables large firms to reestablish close
links with their customers, as was the case with Ford’s usage of the Internet to solicit
feedback directly from end consumers or IBM’s adoption of digital practices. Further, large
and established firms often operate on a global or multiregional scope and can reap significant
benefits from using digital processes to link employees and partners that are geographically
dispersed.
Lastly, larger and established firms, because of their resources and standing in the
marketplace, may be more inclined to digitize processes. Recent writings about the
information economy embrace the idea that networks of firms will become pervasive in
the new competitive arena. These networks reflect a growing trend toward partnering with
parties in the supply chain, increasing outsourcing, or establishing alliances to support
innovation and obtain complementary technology (e.g., Evans and Wurster, 2000; Porter,
1996; Tapscott et al., 2000). To the extent that a firm’s reputation or market position improves
its networking potential, one would expect the established and large firms to have easier time
migrating to electronic modes of business. Other characteristics of established and large firms
are also likely to be advantageous when venturing into the Internet business environment.
Among these are having a large and dependable customer base, intellectual property rights,
larger and experienced development staff, manufacturing and low cost capabilities, and
reputation and proven success in innovation (Shapiro and Varian, 1998).
8.2. Process digitization and strategy
The second research question dealt with the relationship between digitization of business
processes and strategic orientation. Analyses support the proposition that the Internet
facilitates access to resources that may be used by firms to support competitive strategy.
Results indicate that the contribution of process digitization to the explained variance in both
innovation and low cost strategies is significant.
Several general patterns emerge that shed light on the relationship between strategy and
process digitization. First, digitization of information-related activities is positively associated
with both innovation and efficiency orientations. This result is consistent with one of the
primary functions associated with online activities, namely the ease with which one can search
for and obtain information. Since both strategies reflect the inclination to monitor competitive
environment, interpret it, and respond to it, digitization of information activities such as
competitive benchmarking or external research is advantageous for firms that emphasize
product innovation as well as for firms that emphasize low cost and price differentiation.
Second, digitization of advertising, marketing, sales, and customer support is negatively
associated with both innovation and efficiency orientations. We argued that the reach and
richness of online activities, the ease with which customer feedback can be obtained, and
perception regarding lower costs of the digital form will make marketing-related activities an
attractive choice for both firms that emphasize product innovation and firms that emphasize
lowering costs. Our results, indicating a negative relationship, are surprising and unexpected.
These results may be explained in two ways. It may be that marketing activities in general
and the digitization of those activities in particular are not especially important for the
specific strategies studied in the context of the magazine publishing industry. That is,
differentiation through product innovation is a strategy that emphasizes the quality and
features of the magazine content, and it may be that the more resources firms put into product
enhancement and development the less they invest in marketing. Similarly, emphasizing low
costs may be at odds with increased investment related to marketing, sales, or customer
support. In fact, it may be that a low cost strategy leads firms to cut down on those activities
in favor of cutting costs.
An alternate explanation stems from the fact that the strong negative relationship was
observed with both innovation and efficiency orientations. Our analyses show that the
stronger the strategic emphasis (whether on innovation or lower cost) the less firms digitize
marketing activities. In other words, the firms that make extensive use of the Internet for
advertising, marketing, sales, or customers support are those that put less emphasis on
innovation and/or low cost. This raises the possibility that the digitization of marketing
activities may be related to the absence of strategic focus in general rather than to a lack of
a specific type of strategy and that firms that lack strategic focus digitize their marketing-
related activities in an attempt to substitute for clear direction. Given the perceived ease
with which online marketing, sales, and customer support may appear to businesses, it
may be that firms opt for this solution as a relatively simple and supposedly straightfor-
ward attempt to positively impact the business, while firms that do have a clear strategic
focus evaluate the digitization of each type of activity for its merit and only select to
engage in those that appear to support their strategic objectives (Christensen, 1995;
Downes and Mui, 1995).
A third general pattern that emerges from the results presented in Table 3 has to do with the
digitization of communication activities. Digitization of communication activities, measured
through use of e-mail in general and for communication with suppliers or other stakeholders,
is positively related only to innovation orientation. Digitization of communication activities is
beneficial to differentiators in terms of improving and speeding up communication within the
firm and with its customers and suppliers, and it appears that firms emphasizing innovation
realize this. However, digitization of communication activities is also beneficial for firms
pursuing internal efficiencies because of the cost savings associated with speed, lower error
rates, and less bureaucracy and paperwork. Findings suggest that firms may not fully realize
this potential benefit.
The last pattern that emerges from our analyses pertains to the effect of firm age and size
on the process digitization–strategy relationship. Hypotheses 4a and 4b stated that the
relationship will be stronger in newer and in smaller firms. Results (presented in Table 3) do
not support the argument regarding the impact of firm size but provide some support for the
hypothesis on interaction with age. Although the only significant model is the one testing
interaction of age and digitization for innovation orientation, a similar pattern is also observed
with regard to efficiency orientation.
To further explore the role of firm age and size in the digitization of business processes, we
employed a median split analysis (Jaccard et al., 1991). This approach is considered an
alternative to traditional product-term analysis and has its limitations in terms of reduced
precision, yet we added it to our analysis because it enabled to identify additional trends in the
relationships between digitization and strategy.
These analyses shed additional light on the relationship between digitization, strategy, and
firm age and size. First, the relationship between process digitization and strategy appears to
be more substantial in newer and smaller firms than in established or larger firms. In three of
the four sets of analyses (Tables 4 and 5), digitization in newer or smaller firms accounts for
more variance in strategic orientation than digitization in established or larger firms. Second,
the size of the firm moderates the impact of digitization when firms emphasize low costs,
whereas firm age has the most impact on digitization when firms emphasize innovation. That
is, it appears that age has a moderating role when process digitization is used in association
with innovation orientation but not when it is used with an efficiency orientation, as
digitization accounts for 22% of the variance in innovation strategy in newer firms versus
10% in established firms (Table 4). This provides support to the notion that using process
digitization to overcome weaknesses that interfere with innovation is more actively pursued
by newer firms than by established ones. By the same token, 15% of the variance in
efficiency orientation was explained by digitization in smaller firms compared with 4% in
larger firms (Table 5), suggesting that smaller firms use the Internet more than larger firms to
support efficiency efforts. Firm size has traditionally been viewed as indicative of the
resources that are available to the firm, and small firms are argued to have fewer resources
and not be able to capitalize on such factors as economies of scale as do larger firms.
Interpreting our results in this context, it may be that smaller firms attempt to compensate for
scarcity of resources and other weaknesses such as the lack of economies of scale by
increasing the extent of their Internet-based activities. Larger firms that more readily enjoy
cost savings due to economies of scale and have more resources at their disposal do not resort
to seeking Internet resources to the same degree.
Finally, the analyses in Tables 4 and 5 also shed light on the negative relationship between
digitization of marketing activities and strategic orientation. The results obtained following the
median split analysis indicate that the negative relationship is generally more pervasive in
newer or smaller firms. Earlier, we argued that the negative relationship between strategy and
digitization of marketing activities might be indicative of the fact that firms use online
marketing, sales, or customer support as a preliminary means for conducting business,
essentially utilizing it in lieu of a clear strategy. The fact that the negative relationship is
more pervasive in newer firms and to some degree in smaller firms supports this interpretation.
8.3. Limitations, implications, and future research
This study is part of a growing area of research that is still in its infancy. Our objectives were
to use existing management theory to study the Internet-based digitization of business
processes. Two main limitations ought to be mentioned. First, the sample was drawn from a
single industry. Although the objective of gaining precision by eliminating variance that is
associated with different industries and competitive contexts has been achieved, the fact that
these results are based on a single industry does limit the generalizability of the findings. Future
research is needed to further probe the questions studied here and whether the results reflect a
phenomenon unique to magazines and/or other information goods or whether the phenomenon
is more general and pervasive across different industries. Second, given the relatively immature
state of empirical research on the Internet, few established measures exist that accurately and
reliably assess the construct of process digitization and Internet-based activities. Despite a rise
in recent work in the area (Bakos and Brynjolfsson, 1999, 2000; Gallaugher et al., 2001;
Shapiro and Varian, 1998), the present study is one of the first to empirically deal with the actual
processes of transferring activities on line. As with any operationalization, the instrument used
does have its flaws. For example, the full scope of business-to-business activities has not been
captured because at the time of the study B2B was not recognized as a significant component of
online business activity. Further, the current state of Internet-based business activities is such
that businesses are rarely able to provide accurate quantitative data as to their online practices,
leading us to the usage of several binary measures for digitization compared with more granular
measures that might have allowed for a finer analysis. The measures employed were in part
based on prior research and will likely be enhanced over time as the state of the art in empirical
research on e-commerce, technology, and digitization develops further. We hope that our
instrument will serve as a baseline that can be leveraged in future work.
Implications from the present study can be discussed from both academic and managerial
standpoints. First, the findings establish the relationship between digitization of business
processes and competitive strategic orientation and support the notion that the Internet consists
of multiple resources that link to strategy and that firms may leverage those resources in support
of their strategies. Second, findings shed light on the manner in which firms use the Internet to
digitize business processes in an effort to enhance innovation or to lower costs. Results indicate
that the most common use of the Internet is associated with information gathering. This finding
is consistent with the growing popularity of the medium and its increasing availability. Yet,
given that the usefulness of the Internet has been argued to be in many forms that lead to cost
savings and efficiencies, it appears that the full potential of conducting business electronically is
not appreciated by a large number of competitors in the industry that we studied. Third, our
analyses consistently show a negative relationship between strategic orientation (toward both
innovation and low cost) and digitization of marketing activities. This finding is unexpected and
may suggest that firms that extensively use online processes for marketing, sales, or customer
support tend to do so in lieu of developing a focused strategy, possibly viewing it as a strategy in
itself that substitutes the need to develop and focus on a clear direction. Clearly, this is one of the
surprising findings that warrant further study.
The present paper examined the nature of shifting business processes to the digital domain. A
major challenge for management researchers is to see whether the theories and explanations
stand the test of reality and whether they can be used to shed light on and increase our
understanding of daily business events. We believe that our empirical study has helped
illuminate issues related to classic and contemporary management theory with respect to the
rapidly developing Internet phenomenon, and we hope that the findings prove useful as new
methods for e-commerce create related process-shifting opportunities for incumbents and
startups. Given the mature state of management literature and the embryonic stage of Internet
and e-commerce research, we hope that the present findings will inspire and challenge others to
investigate such new phenomenon in a manner that synthesizes existing theories of manage-
ment, strategy, and competition and offers relevance to both researchers and practitioners.
Acknowledgements
The study was facilitated by the financial support of the Entrepreneurship and Emerging
Enterprises Center and the Snyder Center for Innovation Management Research at the School
of Management, Syracuse University. The authors are grateful to several anonymous
reviewers and to the editor of this journal for their helpful comments.
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Journal of Business Venturing 18 (2003) 789 – 814

Business process digitization, strategy,

Received 28 February 2000; accepted 31 May 2002

* Corresponding author. Tel.: +1-940-565-4334.

3. Digitization of business processes

activities—in part or in full—to an electronic environment. Some examples of process

3.1. The value of business digitization

4. Firm age, size, and process digitization

5. Business strategy and process digitization

in superior performance relative to competitors (Porter, 1990, 1996). Two types of

5.1. Innovation orientation

5.2. Efficiency orientation

5.3. Effects of age and size on the digitization–strategy relationship

6.1. Procedure and sample

businesses that operate solely in an electronic environment, both in electronic and in

6.2.1. Business strategy

6.2.2. Digitization of business processes

and customer service), Administration (purchasing, shipping/distribution, general adminis-

6.2.5. Control variables

6.3. Statistical procedure

F 1.46 3.00* * 2.19* * 2.73* * 0.43 1.43y 1.19 1.28

F 0.13 1.92 * 1.38 1.59y 0.19 0.77 0.34 1.08

F 1.10 2.25 * 1.20 1.86 * 0.13 1.21 1.17 0.92

8.1. Process digitization and firm age and size

8.2. Process digitization and strategy

8.3. Limitations, implications, and future research

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