Vertical Integration within the Context of Digitization A Case Study on the Dutch Educational Textbook Market

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Frank van Tol

Vertical Integration within the Context of Digitization

A Case Study on the Dutch Educational Textbook Market

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Colophon

Location and Date Groningen, January 2014 Academic Institution University of Groningen

Faculty of Economics and Business Master's Degree Program

MSc Business Administration

Specialization: Strategy & Innovation Contact

Author: Frank van Tol

Email: f.m.van.tol@student.rug.nl Alternate email: f.m.van.tol@gmail.com Student number: S1749943

Supervision

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Abstract

For decades, vertical integration has been an interesting subject for scholars and it has become an institutionalized subject in business studies. However, the current era of digitization caused new motives and drivers that affect vertical integration to float to the surface. The Dutch Education Textbook Market provided for an interesting and uncultivated industry to verify the impact of eight variables, within the context of digitization, on the process of vertical integration. Via a multiple case study, consisted out of four publishers and two distributors, eight propositions on this expected influence were tested. The qualitative results showed that six out of these eight propositions had a positive influence on vertical integration of educational publishers. Two remaining proposition appeared to have no impact on vertical integration in a digitizing environment such as the DETM.

Word count: 24.939

Key words: digitization; education; innovation; publishing; selection system; textbook

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Executive Summary

Until recently, the book publishing industry faced none to very few radical changes. Digitization changed this status quo by unlocking possibilities to produce and deliver books in new (digital) forms. Educational publishing followed not soon thereafter and is currently in the stage of discovering and implementing new digital possibilities. The Dutch Educational Textbook Market is no exception and, with a small number of key publishers and distributors, it provides for a clear and bounded area of research. The central question by which this thesis was guided is: How does digitization influences vertical integration of publishers within the Dutch Educational Textbook Market for Secondary Education and what are the driving forces behind this process?

The process of developing and implementing an innovation is a challenging one. Firms often have to alter institutionalized structures, strategies and business models. For (educational) publishers, the main result of digitization is the separation of the content from its physical carrier. Content has now possibilities to become available in a variety of formats and viewing modes and, more importantly, adjustable and dependent on customers preferences. In order for established publishers to successfully adapt to digitization it is vital to shift to a more customer-centric approach (Donoughue, 2010). One of the various questions to consider when revising a business model is to decide what structures are needed to combine the activities vital to being able to deliver value to the consumer (Teece, 2010). A key element in this case is vertical integration which is the initiation of new business activities, either from within or outside a firm’s value system. In a digital world, the value system of the Dutch Educational Textbook Market as it exists today (publisher ↔ distributor ↔ educational institute) is not guaranteed to remain to exist. Educational publishers can decide to integrate their activities downstream, by offering and distributing their digitized textbooks directly to the educational institutes or distributors can reinforce their position by offering platforms or new digitized textbooks. Based on research of Guan & Rehme (2012) and Osegowitsch & Madhok (2003) eight variables were distilled and formulated that influence vertical integration within the context of digitization. These variables are: 1) technology standards, 2) product complexity, 3) support, 4) development costs, 5) brand importance, 6) synergies, 7) learning and 8) selection systems. Based on the literature on these driving forces, eight propositions were formulated all stated to have an effect on vertical integration of the publishers within the Dutch Educational Textbook Market.

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Educational Textbook Market. Namely, four educational publishers: ThiemeMeulenhoff, Noordhoff Uitgevers, Malmberg, and Eisma Edumedia and two distributors: Van Dijk Educatie and Iddink Nederland. The gathered data was processed into a qualitative data matrix, this in order to create a structured overview of the various answers provided by the interviewees. Moreover, color coding was used to simplify the detection of possible patterns.

The results of the data collection and interviews showed that digital textbooks within the Dutch Educational Textbook Market are certainly increasing in numbers and usage. All educational publishers have digital textbooks in their product portfolio, either entirely digital textbook methods or as a hybrid form. Based on the interview data, a majority of the eight driving forces proofed to have a positive or enhancing effect on vertical integration. Due to the difficulty and lack of willingness to achieve an industry wide technology standard, this variable is a case of doubt with regard to the influence on vertical integration. Exceptions were the importance of brand and a possible shift in selection systems. Therefore, six out of eight propositions were accepted and two were rejected as having an influence on vertical integration in this particular setting and industry.

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5.9.1 Technology Standards ... 59 5.9.2 Product Complexity ... 59 5.9.3 Support ... 60 5.9.4 Development Costs ... 60 5.9.5 Brand importance ... 60 5.9.6 Synergies ... 61 5.9.7 Learning ... 61 5.9.8 Selection System ... 61 5.10 Results summarized ... 62 6 DISCUSSION ... 63 6.1 Propositions discussed ... 63 6.1.1 Technology standards ... 64 6.1.2 Product complexity ... 64 6.1.3 Support ... 65 6.1.4 Development costs ... 65 6.1.5 Brand importance ... 65 6.1.6 Synergies ... 66 6.1.7 Learning ... 66

6.1.8 Shift in the Selection System ... 67

6.1.9 Overview of Propositions ... 67

7 CONCLUSION ... 69

7.1 Implications ... 70

7.1.1 Implications for Theory ... 70

7.1.2 Implications for Practice ... 71

7.2 Limitations and Future Research ... 71

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List of Figures and Tables

Figure 1.a: Actors DETM……….………18

Figure 1.b: Thesis’ Research Model….………19

Figure 3.a: Simplified Conceptual Model..………38

Figure 5.a: Simplified Value Chain..….………48

Figure 5.b: Strategy Quadrant……….……….…57

Table 3.a: Driving Forces Vertical Integration.………37

Table 4.b: Selected Cases………..….………45

Table 5.a: Key Figures DETM………....………47

Table 5.b: Key Figures Educational Institutes..………48

Table 5.c: Qualitative Data Matrix….……….…58

List of Abbreviations

DETM Dutch Educational Textbook Market SEM Secondary Education Market

PE Primary Education (Dutch term: ‘basisonderwijs’)

SE Secondary Education (Dutch term: ‘voortgezet onderwijs’)

IVE Intermediate Vocational Education (Dutch term: ‘middelbaar beroepsonderwijs’)

HE Higher Education (Dutch term: ‘hoger beroepsonderwijs’)

VLE Virtual Learning Environment

ICT Information and Communications Technology

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1 I

NTRODUCTION

n 2009, British writer Stephen Fry posted on Twitter that “books are no more threatened by Kindle1_{than stairs by elevators”. Nowadays, over four years have}

passed, it is arguable whether this statement is still as undoubted as it was back then. In essence the quote includes the two opposing views in the

current discourse on printed vs. digital books: (1) the ones that state digital books are or will be a full replacement and the others (2) who argue that digital books are and will be nothing but an addition to the printed book.

1.1 R

ELEVANCE

Since the invention of the modern printed book, mid fifteen century, the essence and value chain of the book industry remained, to a large extent, unchanged. In chronological order: an author writes a books, then contacts a publisher, this publisher takes care of the printing and marketing process and distributes the books to bookstores. Consumers in turn visit these bookstores to buy the printed version of the book. However, the arrival of electronic reading devices in the last few years threatens to transform the book publishing market to an extent never envisaged before (Emerald, 2002).

With the rise of the personal computer (PC) the first changes, with regard to reading a book, for the general public appeared on the horizon and possibilities opened up to read books from screens. Driven by the successes of the Amazon Kindle (which was introduced in 2009) and, more importantly, the introduction of the Apple iPad in January 2010, the digital book rapidly gained interest by the general audience the last few years.

The rise of the digital book has, undoubtedly, had its influence on the book market. For instance, August 2012 Amazon UK stated that two years after the introduction of the e-book on their website, the sales of the digital e-books outnumbered the sale of printed books thus far in the year 2012 (Nieuwenhuis, 2012). Specifically, in the UK for every 100 printed books, 114 digital books were being sold. More remarkably, this milestone was already reached the year before in the US (Joosse, 2011). As for the Netherlands, the Dutch digital book market is also showing signs of growth. The sales of digital books in the

1_{Kindle is an E-reader device developed by Amazon.}

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“Books are no more threatened by Kindle than stairs by elevators.”

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Netherlands alone doubled in 2011 compared to 2010 (van der Torre, 2012). Unfortunately, alongside with the success stories due to emerging new technologies, there is always a flipside on the coin.

Many industries have dealt, and most still are dealing with, the consequences of a more digitized world: the film, music and newspapers are some examples of the long list. The number of bankruptcies of bookstores in the past years indicate a change within the book market (Zantingh, 2012). Russell Grandinetti, Amazon's vice president of books, summarized it as follows: “The only really necessary people in the publishing process now are the writer and reader,” he said. And “everyone who stands between those two has both risk and opportunity” (Streitfield, 2011). Disintermediation seems to be a threat for the traditional book market, as author Rhymer Rigby stated: “with digital, who needs traditional publishers? Self-publish an e-book and you get to keep a far greater slice of the price than you would with a regular book deal” (Sutherland, 2006). The quotes from Grandinetti and Rigby raise interesting questions with regard to the current and future business models within the publishing industry. The result of disintermediation, the removal of intermediates in a supply chain, is often that remaining actors in a supply chain vertically integrate downstream (such as manufacturers or suppliers selling directly to the consumers). Digitization is regarded as a driver of this phenomenon. For instance, research on changes in particular industries caused by digitization has been conducted on the music distribution (Leyshon, Webb, French, Thrift, & Crewe, 2005) (Hracs, 2012) (Bockstedt, Kauffman, & Riggins, 2006), the gaming industry (Broekhuizen, Lampel, & Rietveld, 2013), the movies (Finney, 2010) (Currah, 2006) (Cunningham & Silver, 2012) and even advertising (Bugge, 2011) (Evans, 2008). These industries face the challenges caused by digitization for already several years.

The previously mentioned quote of Grandinetti is particularly truth for, and focused on, the general book market. The substantial amount of conducted research on digital books versus printed books related topics, is general book market related as well. Despite the fact that research on specifically the book publishing industry still is scarce, the last few years this topic has proven to be an interesting subject for academics. For example on the user acceptance of digital books (van der Weel, 2010) and the general consumer’s attitude towards book digitization (Chen & Granitz, 2012). Also the effect of digitization on institutes that, for decades, exist by the virtue of offering access, indexation and stocking of physical books, namely the libraries (Hunter, 2012) and the adoption of e-readers within libraries (Wexelbaum & Miltenoff, 2012).

Remarkably is that the subject of educational publishing in relation to digitization remains to a large extent unexplored. Despite the notion that the biggest publishers in the world today are educational publishers (Carmody, 2012). The fact that this industry is

“With digital, who needs traditional publishers?”

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not one to be overlooked is recently underlined by Apple. In January 2012 they introduced iBooks 2 and announced cooperation with the three educational publishers Pearson, McGraw-Hill, and Houghton Mifflin Harcourt, whom are responsible for 90 percent of textbooks sold in the United States (Adegoke, 2012).

Most research on digital books in relation with education, discusses the effect of e-books on the learning process. For example the acceptance of tablet-PCs in classrooms from the perspective of the teacher (Ifenthaler & Schweinbenz, 2013) or research regarding sociological insights on writing and reading on paper versus digital (Fortunati & Vincent, 2014). It is only since the last few years that the use of ICT in educational institutes takes didactical and educational aspects into account. A clear shift from the predominant supportive function ICT used to have.

The Dutch Educational Textbook Market (DETM) is still at the dawn of an alike change which has happened with music, games and advertising industries. It is uncertain whether the new technologies will transform the structure of this industry as a whole, the effects of disintermediation and vertical integration, and what the consequences will be for educational publishers. In general, according to Øiestad & Bugge (2013) in their research on digitization of the Norwegian publishing industry, the existing literature on digitization of book publishing can be divided into two directions: 1) practical management of digitization on a firm level and 2) digitization on an industry or national level. This thesis takes their approach by examining the effects of digitization on the industry value chain and how this affects the current business models of the educational publishers at a firm level.

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1.2 R

ESEARCH QUESTIONS

Based upon aforementioned topic introduction, a research question has been formulated. The central question guiding this thesis is as follows:

 How does digitization influences vertical integration of publishers within the Dutch Educational Textbook Market for Secondary Education and what are the driving forces behind this process?

This question may be further elaborated and supported by the following sub-questions:  What is the current state of the Dutch Educational Textbook Market and what are

its characteristics?

 How are the educational publishers gaining new knowledge related to digitization of the market?

 How are the educational publishers and distributors currently coping with the digitization of textbooks?

 How will the value chain most likely evolve in the next five to ten years?

1.3 S

COPE AND

R

ESEARCH

D

OMAIN

The focus of this thesis is the Dutch Educational Textbook Market aimed at providing textbooks for Secondary Education (SE). The foremost reason for defining such a clear boundary is the high level comparability between the various actors and variables. This market has a clear traditional structured value chain, namely: publishers ↔ distributers ↔ educational institutes (see figure 1.a: Actors DETM). The number of main educational publishers and distributors is manageable and, more importantly, the products (textbooks) are relatively homogenous in nature.

The overall aim of this thesis is to shed light on the implications of digitization for the Dutch Educational Textbook Market and examine the effect on the educational publishers in general and vertical integration specific. Based on a multiple case study on four Dutch educational publishers and two distributors this thesis tries to clarify vertical integration as a result of the rise of digital textbooks. It is challenging to formulate a universal term for digital textbooks used in educational institutes. When the term digital textbooks is used in this study, it refers to:

educational tools which entails didactical content develop by educational publishers and require an electronic device, such as a PC, laptop or tablet-pc, in order to use it. This

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definition grasps that a digital textbook is not a digitized printed textbook per se. Often it also entails educational tools, such as lecture and test materials or new digital forms of studying and learning (Pennings, Esmeijer, & Leendertse, 2008).

1.4 O

UTLINE

The following outline concludes this introduction and provides a brief description of what can be expected in the chapters to come. The next chapter, chapter 2, will elaborate on the digitization topic with a presentation of relevant and related literature. The main subjects

are innovation, digitization - in general and in relation to publishing - and vertical integration. Based upon this literature review, a number of variables are identified and a total of eight propositions are drawn. The results from the cases can then be used to determine whether these propositions are correct or whether alternative explanations are more likely to be true. How the gathered information is analyzed will be explained in chapter 4: Methodology. It offers a description of the used research methods, which and how the cases are selected, and from which sources of evidence information is gathered. Furthermore, an explanation is given on how validity is preserved and research bias can be prevented. Next, in Chapter 5: Results, general findings on the DETM are presented along with case-specific findings, classified according the variables identified in chapter 3: Conceptual Model. Subsequently, the Discussion-chapter links the findings to the variables and literature and presents these accordingly. Concluding, in the final chapter an answer to the research questions is presented combined with practical- and theoretical implications of this study. Moreover, the conclusion ends with limitations and opportunities for future research on this or related topics.

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2 T

HEORETICAL FRAMEWORK

he following chapter discusses the theories from the conceptual framework used in the case study. The first paragraph describes relevant theories on innovation and digitization of publishing and educational publishing in particular. Digitization within the educational publishing market (and digitization in general) accelerates vertical integration. Theories on this matter, general and DETM specific, will be discussed in the second and third paragraph.

2.1 I

NNOVATION

Generally innovation has numerous definitions, therefore it is important to find one that suits this thesis best. Jacobs (2009), for example, classifies innovation into three types: product, process and transaction innovations. Furthermore, Wijnberg (2004) states that an innovation comprises something new, which is presented in such a way that the value will be determined by the selectors. The definition that suits this thesis topic best is the one of Garcia & Calantone (2002). They define

innovations as “the iterative processes derived from new market or technological opportunities, including inventions that involve development, production and marketing in order to strive for commercial success of the

invention”. Technological opportunities form the base of the changes within (educational) publishing, namely the digitization of textbooks. Besides the digitization of the end product itself, internal technological structures of publishers will be subject to change. As Cowan et al. (2007) stated in their research, the rapid technical developments force companies to change their technological structure as well.

However, for most organizations changing current structures, strategies or business models is not a straightforward task. Research has shown that it is often difficult for industry incumbents to respond to radical and potential disruptive technologies. In many cases disruptiveness was perceived in terms of changing product characteristics and added value, but not translated into strategy adjustments. Furthermore, the strong belief in current competences to respond to technologic innovations can be a barrier to changes in business models (Sainio & Puumalainen, 2007).

T

"Innovation is the iterative processes derived from new market or

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Digitization within the book publishing industry is no exception when it comes to internal effects. It not only has its effects on technology, more importantly, it influences the organizational mission and strategy, structures and human resource practices as well. The separation of content from carrier is perhaps one of the major aspects with regard to product innovation that have been influenced by the digitization within the publishing industry. The content of a book can now be separated from the physical carrier. This allows the content to be diffused through a variety of electronic or bricks and mortar channels, creating new value propositions (Tian & Martin, 2009).

In order to effectively implement new value propositions, adopt new business models and thriving innovations, new knowledge has to be absorbed in an effective manner. Furthermore, new technologies mean new types of expertise have to be acquired. However, most of these new types of expertise lay outside the firm’s traditional core competencies and have to be acquired outside the firm through, for example, collaboration. The same goes for gaining new knowledge of the customers. An issue highly relevant for educational publishers, as with digitization a whole new area of expertise has opened up.

The Schumpeter trilogy (Schumpeter, 1964) explained the process of an innovation as follows: 1) invention, the technological change process including the conception of new ideas; 2) innovation, the innovation process that involves the development of new ideas into marketable products and processes; 3) diffusion, the diffusion stage in which the new products and processes spread across the potential market. The digitization process within the educational publishing market is roughly halfway phase two. At this point, uncertainty is high for the actors within a particular market. As Stoneman & Diederen (1994) stated: “During the period before a standard is established, potential adopters face the risk of opting for the wrong standard, this uncertainty can have a crippling effect on diffusion”. The technology itself is the main factor that thrives the market both forward as well as holding it back. It is the key element in the mix that leads to the destruction of a prior equilibrium or the inability of a market to achieve any recognizable equilibrium (Bockstedt, Kauffman, & Riggins, 2006). Furthermore, digital products do not only rely on hardware technology. More importantly, these products rely heavily on software formats and distribution channels which need to be adjusted in order to reach a dominant design. As long as there is no dominant design, firms experience a negative transformation pressure. Thus, a thorough insight on all aspects of the industry is essential (Sainio & Puumalainen, 2007).

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 Optional innovation-decisions: choices to adopt or reject an innovation are made by an individual independent of the decisions by other members of an organization.

 Collective innovation-decisions: adoption or rejection through consensus among the members of an organization.

 Authority innovation-decisions: choice to adopt or reject an innovation are made by a relatively few individuals who possess power, social status or technical expertise.

 Contingent innovation-decision: adoption or rejection can only take place after a prior innovation-decision.

Educational publishers are, on the one hand, dependent on choice and the adoption of the educational institutes of digitized textbooks and will have to harvest information regarding this issue from the educational institutes. On the other hand, their dominant place puts them in a position to steer the adoption process and encourage the educational institutes to follow their lead.

Summarized, educational publishers have to take multiple variables into account when it comes to shape, market and appropriating value from the digital textbook innovation. In this light, publishers face numerous challenges and opportunities.

2.2 D

IGITIZATION IN RELATION TO PUBLISHING

The rise of a digitized world enabled not only new opportunities and provides easy access to new markets, moreover it redefined existing structures and established industries. All publishers today face the common challenge of (re)designing business models against a background of digitization, unrelenting competition and growing power of customers (Martin & Tian, 2010).

It is clear that the educational publishing industry remains not unaffected by digitization: the transition from traditional textbooks to digitized textbooks and/or digitized learning methods. Already in 2000 scholars described that “technology today more than ever has a disruptive impact on publishing” affecting all aspects of the publishing value chain: publishing, distribution, sales and the reading of the books itself (Ronte, 2001). For example, it reduced the costs related to printed textbooks such as duplication, distribution and storage but it also impacts the publishers’ internal processes such as editing, sales, and marketing (Martin & Tian, 2010).

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the near future, each with a different pace of growth and characteristics. The first one is native digital, which entails learning material that are essentially interactive pieces of software and requires a high degree of interaction from the users/students with the material. Initially this path is more expensive, but the lower unit cost later should thrive schools’ demand and eventually faster growth. The second path is the one of enhanced print learning materials, these are digital replicas or enhancements of printed textbooks and course materials. Having different formats however result in higher costs, and limits the pace of growth compared to native digital which has not a choice of format (McFadden, 2012).

A possible downside of adopting two approaches simultaneously is the prospect of likely cannibalization: an expected decline in sales of printed textbooks when offering digital books. However, Donoughue (2010) states that despite a possible decline in printed sales, digital books hold the future and many of these new and young buyers of digital books will ripe for conversion into committed, lifelong readers.

Another downside and a possible threat are the lower entry barriers for digital publishing (Sabatier & Fitzelle, 2011). Self-publishing for example is a trend in large and regular book markets where authors distribute their work directly to their audience and bypassing the publishers (Flood, 2011). This does not seem to be a major issue in the educational publishing market, at least it is one that is possible to overcome. The main reason for this is that educational publishers have the connections and experience built up over the years such as contacts with authors, educational institutes, and other relevant institutions (Tian & Martin, 2013).

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But, as the Kodak case taught us, even when radical technological changes within an industry are clearly visible, identifying when the time is right to replace or radically alter existing strategies and business-models is a challenging task (Bugge, 2011).

2.2.1 Business models

A good business model is vital for any healthy organization. As Teece (2010) stated: “without a well-developed business model, innovators will fail to either deliver - or to capture value - from their innovations.” A business model reflects management’s hypothesis about what customers want, how they want it, and how the enterprise can organize to best meet those needs and make a profit (Teece, 2010). Digitization brings disruptive change to markets and force organizations to reexamine their existing models.

According to Thompson (2005) there are two main factors that define the existence of educational publishing: 1) it meets a demand for teaching and learning materials that arises within the field of higher education itself and 2) the institutionalized nature of the adoption system within the educational publishing market, the nature of the relation between higher education publishing and the field of higher education itself. The field of higher education publishing is defined by the distinctive relation between publishing organizations and the teaching activities of educational institutions. The process of digitization will, and already has, a profound effect on this adoption process. As an Australian case showed, the movement of physical books into digital content format has resulted in a significant change in perspectives on both value chains and supply chains (Tian & Martin, 2009).

Digitization of the publishing industry has a direct effect on the business models of the various actors within the value chain, and publishers in particular. The importance of a business model lies in the fact that it makes implicit assumptions about customers, the behaviors of revenues and costs, the changing nature of user needs, and likely competitors’ responses (Teece, 2010). Moreover it articulates the logic and provides data and other evidence that demonstrates how a business creates and delivers value to customers. Effectively capturing value and marketing a product are key (Teece, 2010).

According to Chesbrough (2010) specifically the value network and external environment are subject to rapid changes due to digitization. A limited perception creates path-dependency, which is on the one hand positive because it keeps an organization focused. On the other hand, it forms a barrier in absorbing new and alternative knowledge leading to a lock-in, a stable configuration resistant to change. Moving between these extremes is a challenging task, internal and external environments needs to be monitored constantly and so do business models. A model that is capable of redesign and adaption is optimal, if not a necessity for all organizations (Chesbrough, 2010).

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value elements need to be identified in order to profit from the expected benefits. To achieve this, areas such as strategy, organizational structures, business processes, value chains/networks, revenue streams, competitive advantages, and core competencies need (re-)consideration (Thompson, 2005). Even implementing two or more business models in parallel can be an option. Smith et al. argue that this creates a better long term organizational success (Smith, Binns, & Tushman, 2010).

The great advantages educational publishers already have is the experience built up over the years. This includes aspects such as contacts with authors, educational institutes and other relevant institutions. “The imprimatur of established publishing houses and the value of their brands to customers continues to maintain them in a position of strength” (Tian & Martin, 2013). Advantages such as these could turn out to be decisive. When responding in the right way to the opportunities the digitized market offers, existing educational publishers have a possibility to maintain their dominant position within the market. However, digitization and the resulting changing environments have amplified the need to “consider not only how to address customer needs more astutely, but also how to capture value from providing new products and services” (Teece, 2010). And adding the fact that “gaining a detailed understanding of all relevant facets of environmental change is key for each organization to determine the direction and approach to the market” (Wirtz, Schilke, & Ullrich, 2010), indicates that educational publishers still have to remain aware and manage their innovation and knowledge gaining process with care.

2.3 V

ERTICAL

I

NTEGRATION

As strategist Cooper & Schendel (1976) stated, incremental technological (competence enhancing changes) changes reinforce the competitive positions of incumbent firms in an industry, whereas more radical technological innovations (competence-destroying changes) may pressure existing incumbent firms to develop new competences, skills and capabilities.

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2.3.1 Vertical Integration Defined

According to the influential theory of Michael E. Porter (1997) the attractiveness, or profitability, of an industry is determined by five fundamental forces: rivalry, threat of entry, supplier power, buyer power, and threat of substitutes. Porter links vertical integration to strategic decision making, explaining it as a method for retailers to discipline suppliers on the one hand and as a method for luxury brands to extract every drop of the product differentiation premium for themselves. Here the balance between supplier power and buyer power is central and the location of power along the supply chain is a key issue in understanding how profits can be earned. The biggest threat to profit margins of a firm does not come from competitors but from the adjacent or remote part of the supply chain (McGee, Thomas, & Wilson, 2005). For example: in the oceangoing tanker industry these are the major oil companies, in tires the OEM buyers and steel industry substitute materials and foreign competitors (Porter, 1997).

Throughout the years, vertical integration has been defined in numerous ways. For example: Grossman & Hart (1986) described it as the purchase of the assets of a supplier or purchaser for the purpose of acquiring the residual rights of control. Another, more

general, definition is the explanation that vertical integration is the initiation of a new business activities, be it from within or from outside the firm’s value system (Mol, Nachoem, & Carroll, 2005). The choice firms have with regard to vertical integration is whether value chain activities should be performed within their boundaries; become more vertically integrated, or should be sourced from the market; become less vertically integrated (Xue, Ray, & Sambamurthy, 2013). However, in present day markets and value systems, it is practically impossible to state that a firm is not vertically integrated to some degree. The question therefore is not whether a firm is integrated or not, but the degree to which integration occurs. Integration will almost never take either polar form (Baumol, 1997).

Many of the previous conducted research focuses on vertical integration as a strategic decision or response. Other early research stated that vertical integration decisions that lacked a physical or technical foundation were believed to be deeply problematic (Bain (1968) and Williamson (2005)). The common definition was that on the basis of vertical integration of separable stages of production lay technological explanations or reasons. However, research that took this approach focused in general to manufacturing firms such as steel production or car manufacturing. Moreover, VI can also be part of a competitive strategy. For example using VI as a way to raise entry barriers in one or both markets (Bresnahan & Levin, 2012).

"Vertical integration is the initiation of a new business activities, be it from within or from outside the firm’s value system."

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Furthermore, there are price-theoretical explanations for vertical integration. The essence here is the make or buy principle. Comparing the costs of buying or selling on the market with the costs of internal transfers and decide whether to replace these with one another (Arrow (1969) and Williamson (2005)). In this case, vertical integration decisions are based on the tradeoff between the production cost advantages provided by external specialists and the transaction costs arising from coordinating with external specialists (Williamson, 2005). The costs of transaction with external partners is assumed to be generally higher than the costs of coordination within a firm (Xue, Ray, & Sambamurthy, 2013). However, because of shareholder profit motives, the decision to vertically integrate should not be entirely on costs motives. Instead it should be based on profits (Ding & Mahbubani, 2013). In terms of vertically related production processes, the firm will integrate when the costs of transacting over markets are higher than the internal costs of management (Levy, 1985). Mol et al. (2005) opted another incentive for firms to vertically integrate, namely value chain envy. If firms at a given stage tend to capture more value than they create, then actors in other stages of the value system could experience value chain envy and hence be motivated to vertically integrate into that desirable stage. The feasibility of these strategic responses however depends on how well value is protected at the desirable stage (Mol, Nachoem, & Carroll, 2005).

Osegowitsch & Madhok (2003) divided the vertical integration motives from previous research into two broad categories: 1) strategic, gaining more power and enhancing a position within a market and 2) efficiency considerations such as governance and transaction costs. More importantly, they state that vertical integration in contemporary businesses environments it not so much driven by these traditional motives. They add a third motive, namely vertical integration based on (or caused by) learning-related motives. The research of Guan & Rehme (2012) supports this study, they add that vertical integration of distribution is driven primarily by the external factors including customer demands and the potential benefits involving differentiation, increased information about customers, and supply chain efficiency improvement. Levy (1985) opted a general assumption that firms producing research intensive products are expected to vertically integrate, since the nature of new technologies is difficult to predict.

2.3.2 Vertical Integration and the DETM

Vertical integration, integrating upstream or downstream within the chain, can be relevant when it comes to digitization of the DETM. First educational publishers can decide to integrate their activities downstream, by offering and distributing their digitized textbooks themselves, and take over the role of educational resellers. Educational resellers in turn can move upstream by offering new digitized textbooks or learning methods and thereby reinforcing their position. As Zeitchik (2004) summarized in his

"Vertical integration of distribution is driven primarily by external factors such as customer demands."

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research: “Publishers will think more like retailers, resellers will act more like publishers, traditional roles will become more complicated and the industry's two poles should come closer together”.

According to Ho et al. the general publishing industry is undergoing a transformation from the original publishing value chain (authors, editors, publishers, and distributors to readers) into more personal services focused with a dual author ↔ reader phenomenon (Ho, Wang, & Chengc, 2011). In other words, transformation to a contingent system. Rietveld (2011) phrases this as “the most significant consequence for actors creating the cultural goods is the ability to independently publish their products onto digital distribution channels.”

The book industry and other cultural industries such music, movie and videogames have generally a distinct actor at the start of the value chain, namely the content producers (writers, musicians, programmers). Although content producers within these industries can – with the help of new online digital channels – publish their products themselves, they often lack complementary assets and relationships with relevant gatekeepers in order to overcome entry barriers (Mol, Nachoem, & Carroll, 2005). This is supported by the study of Rietveld (2011). Vertical integration into the stage of publishing will lead to successful commercialization only when content producers have specialized complementary assets (Rietveld, 2011).

MacInnes et al. (2004) showed that within the software industry, the tendency for a publisher to vertically integrate is higher because of the higher need to provide technical support. They found a sharp contrast with the general book industry were this higher support was not necessary due to the low repeated use of a book. “After sales support is not necessary at all in the book industry” they state. This also explains the fact that the coordination costs were higher in the software industry, resulting in more vertical integration. However, they conclude that when books develop more active functionality (novels becoming more like web pages and textbooks more like computer-based training), the coordination requirements at either end of the value chain will increase. As a result, the need for vertical integration rises (MacInnes, Kongsmak, & Heckman, 2004).

The phenomenon of books becoming more interactive is already visible within the DETM. It is not just the digitization of books in general, but also the innovation and development of the carrier of the digital information and the variety of new possibilities this new carrier provides. Meaning an equal amount of new assets and knowledge has to be acquired by the educational publishers in order effectively ‘produce’ digital textbooks.

“Publishers will think more like retailers, resellers will act more like publishers."

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2.4 T

HEORETICAL FRAMEWORK SUMMARIZED

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3 C

ONCEPTUAL

M

ODEL

uan & Rehme (2012) identified in their research on the consequences of vertical integration on a manufacturer-distributor-reseller chain seven driving forces behind vertical integration. These forces are: Technical complexity, Differentiation, Higher margin, Strategic partnership with customers, Customer demand of integrated solutions, Synergies, and Learning. They took the five prominent contemporary motives for vertical integration of Osegowitsch & Madhok (2003) as an example for their own list. MacInnes et al. (2004) on the other hand conducted research on vertical integration and the relationship between publishers and creators by comparing the software and traditional book industries. In short, digital (software) vs. physical (books). The authors of this research identified six important factors which have an influence on the degree of vertical integration. These factors are: Compatibility standards, Complexity of product development, After sales support, Intellectual property, Development funding and marketing risk, and Brand.

The research of Guan & Rehme (2012) focuses on vertical integration from a more traditional manufacturer-distributer viewpoint whereas Osegowitsch & Madhok (2003) focused on contemporary motives driven by an increasingly technological world. MacInnes et al. (2004) incorporated the digital aspect as well, this time industry specific (books and software). Some of the attributes mentioned in these papers have a certain degree of overlap and are therefore combined. Additional delimitation is made on the basis whether or not these attributes are influenced of accelerated by digitization. This results in seven variables which are used to examine the degree of vertical integration within the DETM due to digitization. Lastly, one additional variable that can be a factor of influence, particularly within the DETM, is the shift in selection systems.

After a brief introduction in the following paragraph, the eight variables are presented and organized in Table 3.a: Driving Forces Vertical Integration.

3.1 D

RIVING FORCES OF VERTICAL INTEGRATION

This paragraph discusses the aforementioned eight variables that are expected to have an influence on vertical integration within a digitizing environment.

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3.1.1 Technology standards

Customers demand solutions and products that can be seeming less integrated into their own business practices such as platforms and certain standards. Market coordination is limited by the need for these compatibility standards which results in a higher degree of vertical integration. The term standards can be explained as the platform (i.e. a device or an operating system) on which the offered content can be used. When there is a variety of viable platforms to choose from, complexity of customer’s adoption decisions increases. Publishers then have to function as a specialist to help in purchasing decisions or develop a certain standard themselves. They have to provide technical advice in the purchasing process, an aspect that is likely to contribute to a higher degree of vertical integration. Osegowitsch & Madhok (2003) paraphrased this process as the move from a system of mass production to one of mass customization. They argue that "as clients concentrate on their own core competencies, they increasingly rely on their suppliers to provide them with integrated solutions." In other words a vertical integration pull by the customer. As an addition, Osegowitsch & Madhok (2003) argue that emerging industries often rely on a set of highly coordinated components, which may be difficult to achieve among independent parties. Therefore, sometimes a pioneering vertically integrated company is needed to break the "holding out" pattern by separated stages of the value chain. To establish a universal technology standard, a coordinated approach is needed. When it is difficult to induce independent partners to embrace a particular standard, it may initially take a vertically integrated company to blaze a trail which often results in a head start for this company. This results in the following proposition:

 Proposition 1: The increasing need of technology standards will accelerate the

vertical integration process within the DETM.

3.1.2 Product complexity

Whereas traditional textbooks have a dynamic rate of close to zero, digital textbooks most likely evolve into a dynamic product with possibilities to update the product. For instance, traditional textbooks are consumed passively opposed to digital textbooks that have an interactive and continues usage. This means that for the latter, aspects such as design, architecture and usability become increasingly important during both the production and in-use stage of the product. Due to this complexity, these activities are rarely outsourced. Thus, the higher the complexity to produce a certain product, the higher the degree of vertical integration will be in this value chain. Furthermore, MacInnes et al. (2004) identified intellectual property as an individual attribute but, since this has overlap with above description, in this thesis it is incorporated under product complexity. The essence of this attribute is that when a company produces software or digital products, having

“As clients concentrate on their own core competencies, they increasingly rely on their suppliers to provide them with integrated solutions.”

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legal ownership over the source code is essential. This to ensure future usage and maintain the ability to adjust exiting codes. For example, it is important to legally own the source code so that a producer is able to expand a certain textbook method without encountering legal conflicts in the future. Therefore, software developers are likely to be brought (or kept) in-house to overcome conflict and coordination processes with external actors. The following proposition regarding product complexity can be formulated:

 Proposition 2: Due to the rise of product complexity, publishers will become more

vertically integrated to keep the complex production process in-house.

3.1.3 Support

MacInnes et al. (2004) stated that products with repeated use and complex installation process require more after sales support that products with low repeated use. Offering decent after sales support requires competencies that are (in the case of new technologies) often not in-house available, resulting in a greater tendency towards vertical integration. Osegowitsch & Madhok (2003) state that in for instance in the manufacturing sector a shift is visible from manufacturing towards maintaining and servicing the existing products. More value is added and grasped downstream in the value chain due to relative difference in number of products in use versus number of products sold, where the former gains a larger share. One of the causes is the rise in technical complexity and performance of the products, this leads to growth in the service requirements. Stated differently, when the number of products in-use is higher than the number new products sold, the focus of a company shifts towards maintaining and servicing these products, which in turn requires new competences. This results in the following proposition:

 Proposition 3: Complex digital products will cause an increase in call for support

by its users, this causes publishers to vertically integrate downstream.

3.1.4 Development costs

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 Proposition 4: Higher development costs within the DETM will drive publishers to

vertically integrate.

3.1.5 Brand importance

Whereas MacInnes et al. (2004) state that in the book publishing industry the brand is of little importance to consumers, within the DETM the brand plays a great role with regard to identifying quality and textbook methods. The greater the value of brand reputation, the more likely is the chance that publishers keep or incorporate certain aspects of the production process in-house. This to ensure or improve quality control. Publishers in industries that lack importance of publisher brand are more likely to be disintermediated in the value chain. For the DETM this means that the greater the importance of a having a strong brand, the higher the degree of vertical integration is. Guan & Rehme (2012) mentioned an alike phenomenon known as differentiation. This occurs mainly in industries where the product is not easily differentiated, either due to the lack of physical differences or it is not perceived as significantly different by customers. When products reach levels of performance that requirements of most customers, further improvements on technical or functional aspects are not effective. As a results, producers shift from differentiation based on technical/functional aspects to differentiation based on unique downstream services. Osegowitsch & Madhok (2003) mention special distribution and delivery guarantees, packaging tailored to the customers’ needs and performance guarantees as examples. A second differentiation strategy is the adoption of brand management to reach a “close control of the companies’ interactions with the final customer in a concentrated effort to establish an emotional connection.” This means controlling marketing, distribution and after-sale services and all other interactions with the customer so that the brand as a whole can be managed effectively. The importance of the factor brand can be summarized in the following proposition:

 Proposition 5: Brand important increases due to digitization, as a result,

publishers become more vertically integrated.

3.1.6 Synergies

Often the user of the product is one of the most important sources of innovation (Osegowitsch & Madhok, 2003). When producers are able to penetrate deep into their clients decision making process, more accurate information about their actual needs can be obtained. For example, by integrating forward into customers inventory planning, more accurate information is gained about demand and new opportunities arise to supply a customer directly instead than through an intermediate distributor. The following proposition is formulated regarding synergies:

 Proposition 6: Digitization enhances synergies which results in a higher degree of

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3.1.7 Learning

Information and knowledge about customers can be accessed by integrating downstream. Products can now be manufactured in direct response to customer demand and in line with their specific needs. Moreover, due to the general shift from a system of mass production to one of mass customization, knowing customers’ precise preferences has become invaluable (Osegowitsch & Madhok, 2003). They also argue that that in industries were the product or service has become commoditized, the need to build long-term relationships with customers is essential. Therefore, the following proposition is formulated:

 Proposition 7: Vertical Integration within the DETM will occur predominantly out

of learning-motives such as synergies.

3.1.8 Shift in the Selection System

According to Mol et al. (2005) selection systems in general can be a useful tool for analysis as they provide a shorthand description of how value is created in competitive processes. Firms compete to create value for the final customers, in so doing they hope to be chosen by the relevant selectors. Selectors have the ability to greatly influence the outcome of this competitive process (Mol, Nachoem, & Carroll, 2005).

Three different ideal-types of selection systems can be identified: market selection, peer selection, and expert selection (Wijnberg N. M., 1994). Market selection is characterized by the notion that the producers are selected directly by the consumers. In the case of peer selection, on the other hand, the producers rather than consumers function as selectors. In an expert selection system, a third party (neither the consumer nor the producer) assesses value with the help of specialized knowledge and/or distinctive abilities. An example of the latter would be physicians prescribing a pharmaceutical product to their patients (Mol, Nachoem, & Carroll, 2005).

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The general book market functions as a market selection system, were producers are selected directly by the consumers. Here the effect of digitization is clearly visible. However, the traditional DETM has a more complex selection system. In general it shows signs of an expert selection system. Despite the fact that students are the final ‘consumers’ of the product, these products are ‘prescribed’ by the teachers or other persons within the educational institutes

with the task of assessing value using specialized knowledge and/or distinctive abilities.

Digitization in general caused consumers to be more actively involved in the product. The ability to directly connect and provide feedback with the producer

increased significantly. Furthermore, interaction among users is, and can be, stimulated through digitization. The product itself becomes more consumer orientated and adjusted to the preferences of the individual user. As Osegowitsch & Madhok (2003) formulated: “New communication technologies have allowed for unprecedented direct contact with customers, enabling the creation of enduring relationships for mutual benefit.” It is therefore not unlikely that these digital developments will cause a shift from expert selection towards market selection within the DETM. The factor selection systems is summarized in the following proposition:

 Proposition 8: Digitization of textbooks within the DETM will cause a shift in

selection systems from expert selection towards a more consumer market selection driven market, resulting in a higher degree of vertical integration.

3.1.9 Table Driving Forces Vertical Integration

The table (Table 3.a: Driving Forces Vertical Integration) on the next page summarizes previous sub-paragraphs and offers a clear overview of the eight discussed driving forces and corresponding sources.

“New communication technologies have allowed for unprecedented direct contact with customers, enabling the creation of enduring relationships for mutual

benefit.”

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Table 3.a: Driving Forces Vertical Integration

3.2 P

ROPOSITIONS

&

CONCEPTUAL MODEL

Aforementioned and discussed driving forces behind vertical integration, forces which are in turn influenced by the process of digitization, are visualized in the following simplified conceptual model (Figure 3.a: Simplified Conceptual Model). This thesis studies the influence of certain driving forces on vertical integration within the context of digitization. Therefore, digitization is visualized as a frame around vertical integration and the driving

Explanation Combined Attributes Mentioned by

Technology Standards

Developing and maintaining integrated products adjusted to customers’ needs lead to a higher degree of vertical integration.

Compatibility standards (MacInnes et al., 2004) and System compatibility / technology standards (Osegowitsch & Madhok, 2003)

Osegowitsch & Madhok, 2003; Shapiro & Varian, 1999; Tiwana et al, Campbell, 1988; Kutschker, 1985; Ghingold & Wilson, 1985; Grashof, 1979.

Product complexity

Products with high (technical) complexity drive producers to keep most production phases in-house.

Product Complexity and Intellectual property (MacInnes et al., 2004)

Gatignon & Robertson, 1991; Rogers, 1962; Lovelock & Weinberg, 1984; Levin, Klevorick, Nelson, & Winter, 1987; Zahra & Bochner, 1999.

Support

Products with large in-use numbers often require constant monitoring and support. This causes producers to become more vertically integrated.

After sales support (MacInnes et al., 2004) and Value Migration (Osegowitsch & Madhok, 2003)

Osegowitsch & Madhok, 2003; Kelly, 1988; Fornell & Wernerfelt, 1987; Kelly, Hoffman & David, 1993; McCollough & Bharadwaj, 1992; Reichheld, 1993; Tax et al., 1998. Development Costs

The more complex a product becomes, the higher the development costs will be and so does the incentive to vertically integrate.

Development funding and marketing risk (MacInnes et al., 2004)

Varian, 1997; Shapiro & Varian, 1998; Tiwana et al., 2001; Mullins, 1998; Tiwana et al., 2001; Ashby, 1960. Brand importance

The greater the importance of a having a strong brand, the higher the degree of vertical integration is.

Brand (MacInnes et al., 2004) & Differentiation (Osegowitsch & Madhok, 2003)

Etgar, 1978;

Osegowitsch & Madhok, 2003; Farquhar, 1989; Kotler, 1997 in Randall et al., 1998.

Synergies

When producers are able to penetrate deep into their clients decision making process, more accurate information about their actual needs can be obtained.

Synergies (Osegowitsch & Madhok, 2003)

Osegowitsch & Madhok, 2003

Learning

Information and knowledge about customers can be accessed by integrating downstream.

Learning (Osegowitsch & Madhok, 2003)

Osegowitsch & Madhok, 2003

Selection System

A shift in the selection system causes an increase in vertical integration. n.a.

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forces. These forces have an influence on the process of vertical integration, and are triggered, intensified or weakened by the process of digitization.

3.3 C

ONCEPTUAL MODEL SUMMARIZED

This chapter presented, discussed and explained eight variables that will be used in this thesis. Variables that are expected to have a certain influence on vertical integration within the DETM and whom, in their turn, expected to thrive in a digitizing environment. These variables are: technology standards, product complexity, support, development costs, brand importance, synergies, learning, and selection systems. This chapter concluded with a visual representation of the variables in the form of a simplified conceptual model.

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4 M

ETHODOLOGY

his chapter discusses the research strategy this thesis follows. The first paragraph explains the choice for a multiple case study approach. Furthermore, the sources of evidence needed to gain the necessary data are presented and the analytic approach to achieve validity and reliability during interviews. Finally, an overview and explanation of the case selection is presented in the last paragraph.

4.1 M

ULTIPLE

C

ASE

S

TUDY

The choice to conduct this thesis in the form of a case study is a logic one. This thesis meets the three conditions posted by Yin (2003). First, for ‘how’ and ‘why’ questions a case study method is likely to be the most appropriate choice. Second, it does not require (and impossible to do so) control of the investigator on behavioral events. Control for all the remaining variables beyond the scope of interest is possible, for example, within a laboratory environment. Third, the focus of this thesis lies on contemporary events. It makes use of a full variety of evidence: documents, artifacts, interviews and observations which sets it apart from history research which can only focuses on the first two sources of evidence. The evidence from multiple cases is often considered more compelling, and the overall study is therefore regarded as being more robust (Herriott & Firestone, 1983). The cases are selected so that it (a) predicts similar results, the literal replication and (b) predicts contrasting results but for anticipatable reasons, the theoretical replication. Four cases, namely the educational publishers, are selected as literal replications and two other cases, the distributers, are selected as theoretical replications. The framework stated the conditions under which a particular phenomenon is likely to be found (a literal replication) as well as the conditions when it is not likely to be found (a theoretical replication).

Thus, the thesis will be primarily shaped by qualitative research, since this focuses more about understanding organizational processes (Cassell & Symon, 1994) and interpreting phenomena instead of quantifying in the case of quantitative research. The research will follow the model of a multiple case study. With this method ‘how’ and ‘why’ questions can be properly answered and a contemporary phenomenon within its real life context can be investigated (Yin & Campbell, 2003).

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4.2 S

OURCES OF EVIDENCE

Data will be collected from the following three sources (Yin & Campbell, 2003). The first one is documentation. This source of evidence has the advantage of being stable (it can be reviewed repeatedly and is exact) and finally it covers a broad area (a long span of time, many events, and multiple settings). The documentation will consist out of written reports such as popular scientific journals, electronic journals, and administrative documents. The second one are archival records. These are generally characterized by the same advantages as the documentation source of evidence has. However, one of the main drawbacks of using archival records is the possible restriction due to privacy reasons. Thirdly, interviews will be conducted. Mainly because qualitative research frequently employs depth interviews as a method of collecting data (Bryman & Bell, 2003). The in-depth interviews were conducted with a minimal duration of 60 minutes each. Transcriptions of the interviews were made based on both the written notes during the interviews and the audio recording that - after approval of the respondent - was made of each interview. Each interview was conducted using an interview template on which the topics and questions were structured. These topics and questions were based on the research framework, and functioned as a guideline during the interviews assuring that every aspect was addressed.

Moreover, in order to answer the research question and to be able to draw conclusions, two data source types are used namely primary and secondary data sources. To gain understanding about the specific educational publisher related information on innovation and digitization processes, primary data will be collected.

One of the most important sources of case study information are interviews (Yin & Campbell, 2003). Well informed interviewees can provide important insights into certain affairs or events. All the interviews were primarily guided conversations rather than structured queries. The type of interviews that were held can be classified as in-depth interviews. Questions were not only asked about facts of a matter, but respondents were also allowed to tell and elaborate on their opinions about certain events.

The interviews were held with representatives of the most important Dutch educational publishers. What all respondents had in common was, besides specific knowledge of the publisher were they were employed at, was their expertise and knowledge of the Dutch Secondary Education market and digital learning methods.