Student: A.J. Hartman
Student Number: S2561646
Supervisor: T.L.J. Broekhuizen
Co-assessor: P.J. Steinberg
Date: 02 March 2020
Word Count: 13636
How Does the Need for Post-Purchase
Services Affect the Digital Transformation
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Abstract
The impact of digitalisation on value systems has received much attention from business scholars. Nevertheless, little is known about how digitalisation transforms value systems for physical products that require post-purchase services (PPSs) like product commissioning and repair service. Such services are traditionally offered by physical dealers and may strengthen their position, thus affect the digital transformation of value systems. By conducting a case study in the Dutch bicycle market, this study sheds new light on how digital transformation of value systems is affected by PPSs. Findings show that when there is a sufficient need for PPSs, incumbent intermediaries can use PPS resources to protect themselves against disintermediation. Furthermore, findings contradict the prevailing view that digital transformation is a one-way process. Findings evidentially portrait the digital transformation of value systems as a dynamic process; the extent to which activities in value systems are digitized can increase and decrease. Moreover, findings show that a high need for PPSs offers a temporal protection against digital disruption.
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Table of Contents
Introduction ... 4
Theory ... 5
Channel Function and Activity Allocation ... 5
Transaction Cost Economics ... 6
The Resource Based View ... 7
Digital Transformation of Value Systems ... 7
Digital Disruption ... 7
The Desire of Producers to Bypass Intermediaries ... 8
The Process of Digital Transformation of Value Systems ... 9
How Post-Purchase Services Affect Digital Disruption of Value Systems ... 9
Methodology ... 11
Research Design ... 11
Case Selection ... 11
Data Collection ... 12
Primary Data Sources ... 12
Secondary Data Sources ... 13
Data Analysis ... 15 Findings ... 15 Industry Trends ... 16 Redistribution of Activities ... 18 Horizontal Redistribution ... 18 Vertical Redistribution ... 20
Reconfiguration of Value Systems ... 24
Entrance of Mobile PPS providers ... 24
Entrance of Bicycle-as-a-Service Providers ... 25
Obsolescence of Intermediaries ... 25
Discussion ... 26
Interpretation of Findings ... 26
Theoretical Implications ... 30
Managerial Implications ... 31
Research Limitations and Future Research ... 31
Conclusion ... 32
References ... 33
Appendices ... 37
Appendix A: Product Distribution within the Bicycle Market ... 37
Appendix B: Subsidiary Producers ... 37
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Introduction
The advent of the Internet gave birth to decades of new business challenges. Activities within value systems (inter-linked firms active in the same industry) (c.f. Porter, 1985) are getting increasingly interwoven with the Internet. Product orientation has largely moved from physical stores to websites. The Internet has become a vital source for buyers to gather information about product offerings and seems to be increasingly preferred over interaction with physical salespeople (Forrester, 2017). Online selling (e-commerce) has expanded rapidly (UNCTAD, 2019) and continues to grow at a fast rate (Forrester, 2018; Statista, 2019). Moreover, new digital technologies (such as the Internet of Things (IoT) and 3D printing) are emerging and could drastically change the allocation of activities among actors within value systems.
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against the changes by benefitting from existing resources (Broekhuizen et al., 2013; Mol, Wijnberg, & Carroll, 2005). An important limitation to these studies is that they mostly investigate industries with digital or digitizable products like video games, music, or very standardized products (such as physical books, DVDs, etc.). Yet, much less is known about how digitalisation affects the value system and the activities that actors perform for industries for products that require post-purchase services (hereinafter: PPSs) like reparations and maintenance.
This research aims to provide more insight into how the need for PPSs shapes the impact of digitalisation on value systems. Previous studies have shown that existing resources can strengthen the position of incumbents (Barney, 1991; Porter, 1979) and buffer against the effects of digitalisation (Broekhuizen et al., 2013). Furthermore, theory suggests that an incumbent’s ownership of resources affects its ability to re-establish into a digitized value system (Chircu & Kauffman, 2000). Products demanding PPS could, in line with these theories, empower incumbents possessing physical resources and therefore greatly affect the distribution of existing and newly emerged activities among actors. To provide an answer to how and why digitalisation reconfigures the value system, and redistributes activities among firms, this study performs a case study in the Dutch bicycle market. The remainder of this paper is structured as follows. Section 2 contains a literature review. Section 3 describes the methodology. Section 4 presents the results of the case study. Section 5 discusses findings, provides theoretical and managerial implications and explains research limitations and future research opportunities. Lastly, section 6 will provide a conclusion.
Theory
This section is structured as follows. Firstly, a description will be given about channel functions and activities. Secondly, two important theories, Transaction Cost Economics (TCE) and the Resource Based View (RBV), will be used to explain the structure of value systems. Thirdly, based on prior studies held in industries with digital or digitizable products, the disruptive impact of digitalisation on value systems will be explained. Lastly, the impact of pre-purchase and post-purchase services on digital transformation of value systems will be addressed.
Channel Function and Activity Allocation
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between producers and buyers by facilitating their exchanges. Since this study primarily focusses on the disruption of resellers, the allocation of logistic activities (such as transportation and inventory holding) within value systems falls outside the scope of this research. A limitation of the framework of Peterson et al. is the focus on product distribution. Repair and maintenance service is not included in the framework but can be essential for product consumption. In order to explain the structure of value systems with products demanding those services, this research extends the framework of Peterson et al. by adding a channel comprising these activities (see Table 1).
Transaction Cost Economics
In the literature, TCE and RBV are often used to explain why producers and buyers choose to perform activities themselves or involve an intermediary during the buying process. TCE supposes that vertical boundaries are determined by the cost of using markets or internal hierarchies (Coase, 1937; Williamson, 1975). Firms have two ways to organize activities: internal (making) and external (buying) (Coase, 1937; Williamson, 1975). Buying comes with additional buying expenses, called transaction costs (Coase, 1937; Williamson, 1975; Williamson, 1985), such as: searching, informing, contracting and monitoring expenses. The last two are the result of preventing undesired buying outcomes as a result of a supplier’s opportunism and mistakes (Williamson, 1985). Cost minimization is seen as the key driver for activity allocation; the decision to make is based on its benefits over buying. As buying expenses include both the purchase price and the transaction costs, the ability of a supplier to produce efficient stimulates and transaction costs discourages buying.
In the context of value systems, producers and buyers have the choice to exchange directly, and thus perform all channel activities themselves, or to exchange indirectly, and thus outsource certain activities to intermediaries. Therefore, vertical boundaries of value systems can be seen as the result of producer and buyer “make-or-buy” decisions (Rangan, Menezes, & Maier, 1992). The degree to which intermediaries are involved in producer – buyer exchanges depends, according to TCE, on
Value System Channel Core Activity
Pre-Purchase Services Communication Channel o Product Display o Purchase Advice
Purchase Services Transaction Channel o Producing Orders o Selling
Post-Purchase Services Distribution Channel
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their ability to add value by reducing exchange costs (Malone et al., 1987). According to the classic economic principle of division of labour, specialization increases efficiency. From this perspective, intermediation occurs because specialisation enables intermediaries to perform activities at lower costs (Rosenbloom, 2002). On the other hand, intermediary services also include purchase costs and transaction costs. If these costs combined are lower than the cost of direct exchange, buyers and producers are expected to use indirect, intermediated, channels (Malone et al., 1987). Otherwise, buyers and producers are expected to use direct channels (Malone et al., 1987). Over time, direct channels may become more cost efficient than indirect channels. This may entice producers to exchange directly with buyers by removing intermediaries from channels or bypassing intermediaries with a direct channel (Mallen, 1973; Malone et al., 1987), an event called activity integration. The Resource Based View
The RBV takes a different approach and focuses on the resources owned by producers and intermediaries. RBV conceptualises firms as “heterogeneous bundles of resources” that try to maximize long-run profits by exploiting and developing resources (Penrose, 1959; Tsang, 2000). Similar to TCE, in an effort to maximize profit, cost minimization is supposed to be a driver for activity integration and outsourcing decisions (Tsang, 2000). The RBV differs from TCE as it takes resource scarcity, resource heterogeneity and value creation by intermediaries into account (Tsang, 2000) and states that a lack of resources (Poppo & Zenger, 1998), collaboration synergy (Zajac & Olsen, 1993) and strategic focus on core competencies (Quinn & Hilmer, 1994) stimulates firms to outsource activities.
Digital Transformation of Value Systems
Digital Disruption8
or removing intermediaries in all channels, or on activity level, bypassing or removing of intermediaries within a certain channel. Similarly, new intermediaries may challenge incumbent intermediaries in all or in specific channels. A focus on actors neglects these types of disruptions. As said, according to TCE and RBV intermediaries exist because of their ability to reduce transaction costs and/or ownership of resources necessary for product commercialisation. The Internet offers an alternative way to exchange information and to sell. Therefore it challenges physical channels and the intermediaries operating in these channels. In order to stay economically relevant, incumbent intermediaries need to be able to add value, otherwise they will be replaced by digital intermediaries or their activities will be integrated into the operations of producers (i.e. disintermediation) (Gellman, 1996; Rosenbloom, 2007).
According to a study of Mol et al. (2005), if producers perceive an unfair distribution of profit among channel members, defined as a situation where an actors’ value capture exceeds its added value, other actors experience value chain envy. This envy may incentivize them to vertically integrate or enter the desired stage. Their findings show that when functions become easier (i.e., less costly to perform) due to technological improvements, profit margins should be adapted to match the new level of added value, otherwise this imbalance will ensue disintermediation.
In an effort to reduce transaction costs between buyers and producers, incumbent intermediaries face the threat of business erosion due to a shift in the composition of transaction costs (Chircu & Kauffman, 1999a; Malone et al., 1987; Sarkar et al., 1995). The Internet makes it easier to spread and gather information, which might decrease the added value of incumbent intermediaries within communication and transaction channels (Malone et al., 1987; Sarkar et al., 1995). On the other hand, the wide availability of online information may overflow customers and increases the need for intermediaries, in form of aggregators, to reduce search costs (Bakos, 1998; Broekhuizen et al., 2013; Malone et al., 1987).
The Desire of Producers to Bypass Intermediaries
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order to decrease this risk, producers can reduce their external dependence by resource absorption (e.g. vertical integration) and resource substitution (e.g. assessing other markets and resellers) (Pfeffer, 1987). Digitalisation may enable producers to vertically integrate or to decrease their dependence on incumbent intermediaries by involving other (online) intermediaries.
The Process of Digital Transformation of Value Systems
Chircu and Kauffman’ (2000; 1999b) introduced the IDR-framework to describe the digital transformation of channels. According to their framework, digital transformation is characterised by three competitive phases: intermediation, disintermediation, and reintermediation. In the first phase, digital intermediaries enter traditional (offline) markets. In the following phase disintermediation occurs; digital intermediaries capture market share and push incumbent intermediaries partially out of the market. In the reintermediation phase, incumbent intermediaries try to re-establish and to recapture some of their lost market share. During reintermediation, incumbent intermediaries enter the e-commerce market themselves (Chircu & Kauffman, 1999b). In order to protect their business, digital intermediaries in their turn, reposition themselves into the value system by licensing assets or partnering with incumbent intermediaries (Chircu & Kauffman, 1999b). The extent to which incumbent intermediaries are able to reposition themselves depends on their ability to leverage physical resources (such as economies of scale) in a digitized value system (Chircu & Kauffman, 2000). If incumbent intermediaries are able to leverage resources for online selling, they could outcompete digital intermediaries which have not developed these resources. Therefore, complementary resources can create a buffer and protect incumbents against digital driven disintermediation (Broekhuizen et al., 2013).
How Post-Purchase Services Affect Digital Disruption of Value Systems
10 of value systems (Peterson et al., 1997).
In an example about Mazda’s rotary engine, Teece (1986) mentions that repair facilities are critical for product commercialisation. However, studies building on Teece’s propositions have neglected the impact of PPS needs on the digital transformation of value systems. Literature does give some possible explanations. As explained, TCE fundamentally states that the perceived transaction risk discourages buying. Buyers could perceive a higher risk for inadequate PPS when buying online. Therefore, the need for these services could affect the impact of digitalisation on transaction channels negatively. Moreover, when producers integrate the transaction channel and start selling online, it makes them a direct competitor of their intermediaries. This could harm cooperation between producers and intermediaries (Liu, Luo, Yang, & Maksimov, 2014) and lead to intermediary alienation, causing dysfunctional behaviour, harm to profits, and result in dissolution of producer–intermediary relationships (Etgar, 1977; Eyuboglu & Kabadayi, 2005; Gaski & Ray, 2001), thus provoke disintermediation. When producers depend on intermediaries for current sales and in the fulfilment of PPSs, producers face the challenge to gain support of the intermediaries they try to replace, a so-called “disruptor dilemma” (Ansari et al., 2016). In general, the extent to which producers are dependent on intermediaries determines the risk of harm when upsetting dealers. Therefore, if PPSs are essential for the selling of a product, producers might not want to take actions that upset intermediaries. Thus, PPS needs should likely reduce transaction channel integration.
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Methodology
Given the explorative nature of this study, an inductive case study has been conducted (Miles, Huberman, & Saldana, 2014). An inductive approach has found to be useful to deepen understanding about situations and to build theory (Cooper & Schindler, 2003), especially when the research question involves a process and the object of study is not addressed well in extant literature (Ozcan & Eisenhardt, 2009). Moreover, value systems of a multitude of producers and intermediaries are analysed, which adds validity to findings because it enables comparison and therefore improves accuracy and reliability (Eisenhardt, 1991; Yin, 1994). The perspective of this research is both descriptive and prescriptive (Van Aken, Berends, & Van der Bij, 2007). In the Dutch bicycle market (hereinafter: bicycle market) producers and intermediaries are faced with digital disruption due to the emergence of e-commerce and substitutive Internet-enabled business models. Findings will therefore explain how digital transformation of value systems happens and its effect on actors within value systems. Further, findings will help to understand how digitalisation in similar industries may happen in the future.
Research Design
Since the goal of this research is to extend theory, case selection has been conducted for theoretical rather than statistical reasons (Eisenhardt, 1989; Glaser & Strauss, 1967). The bicycle market was expected to contain data rich enough to deliver new insights and therefore bring sufficient theoretical depth to this study. Since the key objective of this research is to enrich literature with new insights rather than building of generic theory, investigating more industries was considered unnecessary (Miles et al., 2014).
Case Selection
The bicycle market has been selected because value systems in this market are drastically changing due to the emergence of e-commerce, rise of other Internet-enabled business models and the increased importance of PPSs. Since bicycle parts wear down during product usage, product consumption is characterised with regular maintenance and reparations. Therefore, independent physical dealers traditionally fulfilled both reselling and repairing roles within value systems. In several European countries, these dealers have been largely removed from value systems by other retailers (such as supermarkets and sporting goods stores) but in the Netherlands, reselling has largely remained with dealers (see Appendix A).
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before they enter physical stores. Further, online dealers have emerged and expanded rapidly in the bicycle market. Moreover, the Internet has facilitated the entry of producers that only sell via their own webstore. Simultaneously, PPS seems to have become more important in the bicycle market. As mechanical and electrical parts wear down and can break, higher complexity due to the use of more parts increases the need for repair and maintenance service. The advent of E-Bikes could therefore increase the need for PPS in the bicycle market. Moreover, the use of E-Bikes as an alternative way of transport increases the importance of having a proper functioning bicycle and therefore increases the need for PPSs. Because of this duality, digital disruption and increasing importance of PPS, this case was expected to give unique insight in the extent to which the need for PPSs affect the digital transformation within value systems.
Data Collection
Primary Data Sources13
Producers purchase a license for the software and distribute it among dealers, who use it to produce orders (i.e. transaction channel). However, producers could also use the configurator to sell online as the configurator enables buyers to order themselves without mediation of dealers (i.e. transaction channel integration). In order to get a better understanding about the adoption of the configurator as an online selling tool for producers, more insight was needed in how dealer dependence affects the decision of producers regarding the introduction of webstores and how this process takes place. Investigating how the need for PPSs steer digitalisation and allocation of activities within value systems was expected to contribute to this understanding.
In the second phase, a producer has been interviewed. This producer has been selected because it had taken steps towards (digital) communication and transaction channel integration. The bicycle producer has actively explored whether they should digitize and integrate its distribution channel in Germany. The producer had a plan to integrate selling by opening a webstore and to outsource PPS to a mobile bike service provider. However, the producer chose not to execute this plan because of the risks involved regarding the ability of the service provider to deliver adequate service. As producers might not be willing to share details about their current strategy, interviewing a producer who has explored how to rearrange its value system was expected to be a good alternative. In the last phase, bicycle dealers have been interviewed. Dealers were selected based on their difference regarding digitalisation: Dealer #1 only sells offline whereas Dealer #2 also sells online. The goal of this selection was to avoid a selection bias; dealers with a webstore might have a different view regarding digitalisation than dealers without a webstore.
Secondary Data Sources
Secondary data has been gathered to get a broader knowledge about the bicycle market. Data was collected through websites of producers, dealers and other intermediaries, publications on specialized press sites for the Dutch bicycle industry, articles of major Dutch newspapers (e.g. NRC, Het Financieele Dagblad, Nederlands Dagblad, Telegraaf) and external industry reports (by e.g. Rabobank and BOVAG). Data has been collected from September till December. Findings from secondary data have been used extensively as side notes for interviews and new insights from interviews have led to
Companies Interview Duration Interviewee Job Title Producer Interview: 169 min
Follow up: 75 min
Assistant Manager Marketing & Product Development
Configurator Producer Interview: 73 min General Manager & Co-Founder Dealer #1 Interview: 33 min Two Store Managers
14 additional data collection.
Secondary data about value system integration has been gathered through sampling. The size of the producer samples was based on the theoretical usefulness. Collecting data about producers was stopped after reaching a point of theoretical saturation (Glaser & Strauss, 1967). An oversight of the producer sample can be found in Table 5. To be added to the sample, producers had to meet the following requirements: having a direct and/or indirect distribution channel in the Netherlands and manufacturing products in one or multiple categories as described in Table 3.
Categories Kids Urban
Sports (Race, Mountain Bike and Trekking) Cargo (Family and Good Transport) Table 3. Product Categories
Next, producers were chosen based on the availability of information regarding their value systems in e.g. newspapers and whether they were mentioned by interviewees. Several producers have multiple subsidiaries that produce bikes under their subsidiary name. These subsidiaries were also added to the sample if they met the previously mentioned requirements (see Appendix B). Producers with unconventional value systems have enjoyed much media attention and were also included in the sample. In order to cover the wider range of producers, the sample has been supplemented with producers with less integrated value systems. Since this research focusses on the changing role of intermediaries within digital transforming value systems, non-intermediated producers fall outside the theoretical scope of this research. Nonetheless, these producers are included in the sample because neglecting them would give an incomplete and perhaps a distorted picture of the current situation and developments within the bicycle market.
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Data Analysis
Data analysis has been conducted in three stages. In the first stage, interviews have been transcribed. In the second stage, data about producer integration has been analysed and used to construct Table 5. In the third stage, the industry has been analysed by looking for related constructs, themes and trends, until the point of theoretical saturation was reached (Miles et al., 2014). During data analysis, interviews and secondary sources have been used to complement and correct the data to ensure reliability of findings (Eisenhardt, 1989; Yin, 1994). Analysis has been conducted through ATLAS.ti, a computer program widely used in qualitative research. Primary data (106 pages of interview transcripts, 9 phone calls, 2 mail and 3 webchat conversations) and secondary data (over 600 pages) have been downloaded into this program and coded according to subject and actor.
Findings
This section is structured as follows. First, a summary will be given about product distribution within the bicycle market, the rise of e-commerce and the impact of electric urban bicycles (E-Bikes) on digital transformation of value systems. Secondly, findings about the redistribution of activities within value systems will be presented. Lastly, attention will be paid to the reconfiguration of value systems regarding the entry of new types of intermediaries as well as the obsolescence of intermediaries (i.e. disintermediation). The initial goal of this research was to investigate the impact of PPS needs on the digital transformation of value systems. However, during data analysis it became evident that the
Value System Channel Core Activity Activity Integration Communication Channel Product Display
Purchase Advice
Product Display on Websites, Physical Producer Showroom, Test on Location Online Product Advisor*
Transaction Channel Producing Orders Selling
Online Order Functionality Conducting Selling Transaction Distribution Channel Product Commissioning
Product Delivery
Commissioning Service by Producer At Home and/or Producer
Showroom/Store Repair and Maintenance
Channel
Repair Service Repair Service by Producer
Table 4. Vertical Integration Framework
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increased importance of product experience profoundly affected the emergence of e-commerce. Results therefore describe both the need for PPSs and physical product experience on the digital transformation of value systems.
Industry Trends
In the bicycle market, physical dealers remain to play a central role in value systems of producers. Although new retailers (e.g. hardware stores and online retailers) have started to sell bicycles, they predominantly sell bicycles of lesser-known (and often Asian) brands. Major producers remain to sell their bicycles indirectly via their preferred dealers. Several new producers have entered the market and distribute solely directly to buyers but incumbent producers still largely rely on physical dealers for product selling (see Figure 1 and Table 5). According to the interviewed producer, bicycle producers prefer selling via physical dealers because they also provide PPSs. He said:
“We [producers] need local service points because customers need a place to go when they have questions or when their bike is broken. (…) we either need to contract repair service providers, or integrate it into our own operations because after-sales service is very important.”
A market research of Roland Berger (Versterking Fietsen Retail Nederland) concluded that the average consumers wants to travel at most 5 km to receive repair service. Despite the incumbent producers’ preference for selling via physical dealers and the demand of consumers for local repair service, e-commerce has rapidly gained market share (Figure 1). Further, the advent of major online dealers has increased price competition and, in general, led to a drastic decrease in sales margin. According to BikeDealer #2, providing repair service has therefore become a more important source of revenue. He said:
“Just like with car dealers, that [the workshop] is where we need to make our profit. Five years ago, this was not the case. Those days we earned most of our profit with selling bikes (…) Nowedays, the profitability of our store really depends on the efficency of our workshop.”
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The E-Bike segment has grown substantially and has largely replaced the non-electric urban bicycle segment (Figure 2). In other segments, electric motors are also increasingly used; cargo bicycles are often equipped with electric motors and in the sporting segment, electric road and mountain bikes have entered the market. Since these segments are relatively small (Mobiliteit in Cijfers Tweewielers 2019-2020), their impact is limited compared to the impact of E-Bikes. The rise of E-Bikes has skyrocketed the amount of money buyers spend on bicycles. In comparison: in 2018 the average prices of non-electric urban bicycles and E-Bikes were €605 and €2013 respectively (Mobiliteit in Cijfers Tweewielers 2019-2020). Furthermore, the different types of electrical component have increased product variety. According to Dealer #2, buyers of E-Bikes have a higher desire to experience products during their orientation phase. He said the following:
“Customers don’t buy an E-Bike like “oh just give me that one”. Sometimes that way of buying happened with urban [non-electric] Gazelle bikes but this has changed. Customers want to try and feel an E-Bike, also because of the [high] price (…) E-Bikes are expensive and customers want to experience them before buying. Buying E-Bikes is something special. Previously, customers didn’t think about buying bikes this way but this has changed (…). Nowadays, buyers enter the store and take time to try and buy a bike”
Further, the rise of E-Bikes has increased the need for PPSs. In regard to product commissioning Dealer #2 stated:
“Conventional city bikes are very easy to setup and adjust; tighten the axle nuts and you’re ready to use it. However, setting up E-Bikes is more complex. (…) If I see what my mechanics have to do to properly deliver a bike to the customer. I can’t even do that myself. You can’t do that at home anymore”
However, since commissioning service can be provided before shipment, the impact of an increased need for commissioning service on the digital transformation of value systems is relatively low. Apart from the wear and tear of mechanical components that non-electric bikes have, E-Bikes also face wear and malfunction of electrical components. Moreover, some consumers use E-Bikes instead of cars or public transport to commute between home and work, which increases the
Figure 1. E-Commerce vs Traditional Commerce Source: Mobiliteit in Cijfers Tweewielers 2019-2020
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importance of having a well-functioning bicycle, thereby increasing the importance of repair services. Another development is the entrance of corporate leasing of bicycles. A new regulation (Fietsleaseplan 2020) has made corporate lease of E-Bikes financially more attractive and is likely to boost sales and increase the use of E-Bikes for commuting. Leasing might affect the need of consumers for pre- and post- purchase services. Similar to the automobile industry, bicycle lease often includes a package deal (including e.g. maintenance and repair services) and thus it increases the importance of local repair service. At the same time, the lower financial risks might also reduce the desire of consumers to test bicycles during the product orientation phase. Leasing companies often offer a pre-selected set of bicycles that limit the extent to which consumers have to orientate themselves for bicycles. Further, bicycle leasing generally involves operational lease; this means that when a lease contract expires, the bicycle remains property of the leasing company. Since consumers become less often owner of the bicycle, leasing might lower the need to test bicycles before purchasing. In summary, distribution of bicycles remains to occur predominantly through existing physical dealers. E-commerce has gained market share but the rise of E-Bikes seems to have caused a hold on its growth. E-Bikes have increased the desire of consumers to physically touch and test bicycles before purchasing. Moreover, increased technical complexity, commuting dependency and rise of corporate lease have increased the need for PPSs.
Redistribution of Activities
Horizontal Redistribution19
service or discounts compared to customers who bought elsewhere. In extreme cases, physical dealers are hostile towards online retailers and refuse to provide repair service on bicycles bought on the Internet. The increased desire to test before purchasing and the increased importance of PPSs have moved major online dealers to open physical stores, that are often located in large cities and fulfil a regional function. Buyers can visit these stores to test, buy and go to these centres for repair service. For local repair service, buyers often still depend on non-contracted repair service providers. As mentioned above, dealers have become more dependent on revenue from repair service. Fietsenwinkel.nl takes advantage of this and has, besides opening regional stores, established a repair service network of independent repair shops and dealers.
Secondly, several major producers have started to slim down their physical dealer network. Producers have become more selective about their resellers. Dealers that do not meet sales quantity or service quality criteria are pushed out from transaction channels; they either receive a lower sales margin or are removed from dealer networks. Dealer #1B said:
“Many bicycle producers discontinue dealerships (…) we [dealers] need to achieve a minimum turnover to remain a Gazelle dealer. They [producers] don’t want to put time and effort in dealers that only sell 50 Gazelle bikes annually.”
Further, Dealer #1B mentioned:
“To be a dealer, some producers demand a certain level of service, store appearance and assortment…. and are getting increasingly stricter about this.”
Lastly, in light of changing dynamics in physical commerce (i.e. the introduction regional showrooms by producers (see next paragraph) and physical stores by online dealers and) the Dynamo Retail Group (owner of franchise chains Profile and BikeTotaal) has revised the structure of its franchise networks. Limited store space limits dealers in the number of bicycles they can display and the extent to which bicycles can be tested. To offer wider selection, Dynamo has started to open so-called “Experience Centres”. These are large stores, partially owned by franchisees, function as regional showrooms. Consumers can purchase and pickup their bicycles at these centres, or at stores of local franchisees. Further, repair service is offered both at these centres and at local franchisees. As a result, sales and repair service get disconnected; local franchisees are getting less involved in the selling process. In some cases, Experience Centres take over the role of reseller and thus reduce the role of local franchisees provide local repair service.
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stores. Further, producers become more involved in service provision. Lastly, physical dealers remain to perform the same activities, but face the threat of disintermediation due to the a greater selectivity of several major producers regarding their distribution network. Digitalisation has not yet resulted in the disposal of activities but within the Dynamo network there is an apparent shift of selling activities from local franchisees to regional Experience Centres.
Vertical Redistribution
Table 5 provides an overview of the extent to which producers integrate dealer activities into their own operations. Information regarding parent-subsidiary ties can be found in Appendix B. Producers are categorized according to their level of integration of value system channels. In regard to the role of dealers within value systems, a simple distinction can be made between three levels of dealer involvement:
(1) Dealers as distributors (resellers and providers of PPSs); (2) Dealers as repair service providers;
(3) No involvement.
The overview shows that most producers have remained to distribute via dealer networks. These producers integrate both online and offline channels but this has not led to disintermediation of dealers. In response to dealer needs, producers offer additional services that support, and sometimes compete, with dealers. Findings show that producers with dealer networks become more involved in the selling process. The integration of producers into selling occurs mostly online; they use their digital channels not only to inform but also sell bicycles directly to customers in an attempt to push pure- online dealers from their value systems. Furthermore, producers have increased a physical presence by exploiting showrooms at their headquarters. The emergence of producer owned regional showrooms and physical stores indicates that some producers want to get a better hold on or wish to integrate physical commerce. Dealer #1A explained the situation as follows:
“In my opinion there is very much unrest. Many dealers are wondering “What is going to happen?” because a lot is happening. As said, Gazelle and Sparta have taken some steps [to integrate selling] …. but are not able to do it on their own; they still depend on local dealers”
Value System Channels Value System Activities Fully Intermediated (Traditional) Integrated Communication Channel Integrated Communication and Transaction Channel
Integrated Communication, Transaction and Distribution Channel Fully Integrated Communication Channel
Product Display Websites (All) Websites (All) Showroom (All but 5)
Website (All) Showroom (11, 16, 34, 40) Physical Store (24) Website (All) Showroom (38) Physical Store (31, 35, 39) Websites (All) Physical Store (All) On Location (2, 3, 32) Purchase Advice
n.a.
Online Product Advisor (4, 5, 30)
Showroom (All but 5)
Online Product Advisor (26, 33)
Showroom (11, 16,, 34, 40) Physical Store (24)
Online Product Advisor (35) Showroom (38)
Physical Store (31, 35)
Online Product Advisor (32) Physical Store (All)
On Location (2, 3, 32) Transaction
Channel
Order Producing
n.a.
Website (All but 11, 34, 40) Showroom (11, 34, 40)
Website (All) Website (3, 8)
Selling Website (All but 11, 34, 40)
Physical Store (24)
Physical Store (31, 35, 39) Website (All but 35)
Website (3, 8) On Location (2, 32) Physical Store (All) Distribution
Channel
Product Commissioning
n.a.
Producer (All) Producer (All)
Place of Delivery At Home (7, 38, 39)
In Producer Store (31, 35)
At Home and/or in the Showroom/Store (All) Repair and Maintenance Channel Repair Service n.a. On Location (2, 3, 8, 32) In the Store (32) Producers of Electric Bikes (All Types) 6: Bulls
10: Colango 12: Cortina 13: Cube 19: Kalkhoff 25: Pegasus 27: Raleigh 37: Urban Arrow 4: Batavus 5: BMC 14: Dutch ID 15: Flyer 18: Haibike 20: Koga 21: Lapierre 29: Sensa 30: Sparta 11: Conway 16: Gazelle 17: Giant 22: Liv 24: Merida 26: Qwic 33: Stromer 34: Tern 36: Union 40: Victoria 7: Canyon* 31: Specialized** 35: Trek*** 39: VanMoof* 2: Amslod 3: Babboe**** 8: Centaur Cargo 32: Stella Producers not Producing Electric
Bikes
1: Alpina 9: Cervélo 28: Santa Cruz
23: Loekie 38: Van Nicholas
Table 5. Value System Integration
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several of its subsidiary producers (see Appendix B) and has announced that it wants to continue to open more showrooms in collaboration with dealers. Gazelle, a subsidiary of Pon, has opened multiple showrooms across the Netherlands. Another development is the rise of brand stores in which prominent producers establish a network of independent dealers to only sell their products. Regarding transaction channels, producers with dealer networks have started to sell via their company website but offline selling has remained mostly with dealers. In general, showrooms are used to display products and to give advice, but most often they do not facilitate the production of orders. On the other hand, several major producers are experimenting with physical stores. In regard to PPS, producers with dealer networks have not integrated PPS channels. Producers that sell online still involve dealers in product delivery; they rarely distribute bicycles without intermediation of dealers. With the increased need for PPS, the inability of producers to provide repair service deters producers to distribute directly to buyers. The interviewed bicycle producer explained this as follows:
“Nowadays, after-sales service is very important, not only for a products lifetime but also because we want to offer a certain quality and guarantee that when there is a problem, it is solved quickly. (...) The biggest challenge for us is to provide that kind of after-sales services that dealers usually provide. Should we just collaborate with dealers and lower their profit margin? Would they accept a lower margin?”
Some producers have tried to reduce the sales margin of dealers when a product is sold via their website. However, this has led to strong resistance of dealers. To avoid the risk of channel conflicts, producers have decided to offer similar margins when bicycles are sold either via their own websites or via dealers. In regard to the increasing involvement of producers on the selling process, Dealer #1B stated that the role of physical dealers will eventually change. He said:
“In ten years, we will be much more a [repair] service provider instead of a reseller. It seems like we’re heading for that direction, but of course I can’t look into the future. Maybe, it [selling] will come back [to dealers]. However, producers have attempted already a couple of times to …[fully integrate product distribution]”
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“VanMoof bikes are mechanically not different from any other bike. Therefore, [non-contracted] local repair shops can repair and maintain VanMoof bikes. In case of problems with electrical components, VanMoof bikes need to be sent to our store (…) we could also send parts so they can be replaced at a local bike store.”
The grown importance of PPSs has forced Canyon to alter its strategy. Several sources indicate that the company is trying to establish a repair service network by contracting external repair service providers. According to the interviewed producer:
“15 years ago, Canyon entered the Dutch market and expanded very rapidly. (…) On fairs, buyers often told us “Canyon bikes are cheaper but where should we go when something is wrong?”. Previously, bikes had to be sent back to their factory in Germany. Nowadays, consumers are much more demanding; they don’t want to be without a bike 3 or 4 weeks. So, Canyon is changing from an Internet-only producer to a kind of hybrid. They have opened a repair facility in the Netherlands and are trying to establish a repair service network”
In a phone call, a representative of Canyon confirmed this and said:
“There are several local dealers that we know well and have good experience with. We call them “Canyon friendly dealers”. They don’t sell our bikes but you can go to them for reparations, also in the warranty period”
Several fully integrated producers have entered the market. Sometimes these producers use both dealer networks and their integrated channels, however, most producers choose to bypass dealers entirely. In regard to their digitalness, fully integrated producers remain to have a strong physical presence in the selling process by exploiting a network of local stores or test locations. Since these producers entered the market with integrated value systems, disintermediation of dealers has not occurred. Further, it is remarkable that the value systems of Babboe and Centaur Cargo differs from that of other subsidiaries of Accell (see Appendix B). Both companies produce cargo bicycles, which could be considered a niche market, and offer repair service on location. It is likely that Accell uses these brands to establish an integrated repair service network and to gain experience in operating a fully integrated value system.
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dealers and therefore facilitates the provision of quick nearby repair service. Similarly, some bicycles are equipped with fall detection sensors. In case of an accident, these bicycles can automatically call the emergency service. Additionally, these sensors might enable producers to alarm a breakdown service provider to assist consumers when a bicycle is broken. However, these changes are not yet visible in the bicycle market.
Overall, vertical redistribution of activities occurs. Producers with dealer networks become more involved in product selling. Activity integration in communication and transaction channels occurs mostly via websites but several large producers have also started with establishing a physical presence by opening regional showrooms and stores. Further, the need for PPSs has a major impact on the extent to which producers with dealer networks integrate selling into their own operations. Dependence of producers on physical dealers for the provision of PPSs deters them from bypassing dealers from the selling process; producers assist product orientation via their showrooms/websites and sell online but steer buyers to physical dealers by delivering bicycles via these dealers. Moreover, the increased importance of PPSs forces producers without dealer networks to facilitate the provision of PPS by contracting local service providers. Lastly, the advent of IoT enables producers to get a hold on the provision of repair service. Several producers have already introduced Internet connected bicycles and have already started to offer maintenance related services.
Reconfiguration of Value Systems
Entrance of Mobile PPS providersAs mentioned above, the dependence on physical dealers for the provision of PPSs hinders producers to bypass dealer network. This seems to change with the emergence of new mobile PPS providers. According to the interviewed bicycle producer:
“Beause it [The Netherlands] is a very densely populated country, there are many [local] bicycle dealers and thus there is a very fine-grained [repair] service network. Therefore, there was never a need for mobile repair service providers (…) However, nowadays many producers try to sell via their own sales channels. Eventualy, they might decide “Let’s abandon our [physical] dealer network” and partner up with a service provider that does nothing more than product delivery and providing repair service.”
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service instead of sales (or become a franchisee of their franchise networks). In regard to the service offerings of these franchises, there are some differences. FietsNED started as an independent organisation but is acquired by Pon in 2016. However, it has remained to operate as an independent organisation. Pon is very reluctant in their use of FietsNED to bypass physical dealers. FietsNED does not offer delivery service and subsidiaries of Pon (see Appendix C) only advertise for repair service of FietsNED; they do not offer FietsNED repair services via their own websites. Moreover, Pon has announced that it will not use FietsNED for maintenance and reparation of bicycles of its subsidiary company Lease-A-Bike. However, it is very likely that Pon will eventually use FietsNED to integrate PPSs. Pon has acquired several producers of bicycles and accessories and has opened multiple showrooms across the Netherlands; the consolidation of services and products strongly suggests that Pon wishes to start their own distribution network. Another new PPS provider is Get Bike Service. This franchise chain is not related to a producer and provides both delivery and repair service. Since it offers producers an alternative for dealer networks which makes them a direct threat to the involvement of dealers within value systems.
Entrance of Bicycle-as-a-Service Providers
A major shift in the structure of value systems is caused by the emergence of firms that offer bicycles-as-a-service, offered by leasing and rental companies. In regard to the value system configurations and the impact on dealers, the entry of leasing companies could have several effects. Firstly, some leasing companies offer their services via dealers. In this case, leasing companies act as financial service providers and add an activity to transaction channels. Secondly, some leasing companies offer their services online and bypass dealers in terms of the communication and transaction channels. Further, two major rental companies have entered the market NS (a Dutch public transport company that rents bicycles from railroad stations) and Swapfiets (a subsidiary of Pon, which offers bicycles against a monthly subscription) and have started to replace dealers in the buying process. Moreover, physical dealers face the threat of disintermediation from value channels because repair service might be integrated; Swapfiets has already integrated repair service into its own operations.
Obsolescence of Intermediaries
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Discussion
Interpretation of Findings
Table 6 explains the digital transformation of value systems in the bicycle market and the impact of PPSs needs. The table reflects the dynamic nature of digital transformation of value systems, displays the distinctive characteristics of the stages found in the bicycle market and provides an interpretation of the findings. The upper part of the table shows figures of value systems during the digital transformation. The actors are presented as boxes, the size of the box indicates their relative importance in the value system. Lines represent product flow (solid) or PPS flow (dashed). The relative importance of product and PPS flows is expressed in the thickness of the line. The lower part describes the findings per stage and gives an explanation on how PPSs needs affect the distribution of activities in that stage.
Without the Internet, physical dealers dominate both product selling and the provision of PPS. After the introduction of Internet, digital transformation of value systems in the bicycle market can be divided in three stages, 1) Advent of the Internet, 2) Advent of E-Bikes and 3) Entry of other PPS Providers.
• In stage 1, online dealers enter the market, some producers open a direct online selling channel. Physical dealers lose market share and face the threat of disintermediation.
• In stage 2, the advent of the E-Bike increases the need for PPSs; due to higher technical complexity and different product consumption, E-Bikes require more PPSs. Non-electric bicycles, which require less PPS, are substituted by E-Bikes. Also physical product display becomes more important for product selling; consumers prefer testing and touching when buying E-Bikes. Therefore, offline commerce gains a competitive advantage over e-commerce and physical dealers partially re-establish their position within value systems.
• In stage 3, other PPS providers emerge. Bicycle-as-a-Service providers substitute selling and integrate PPS; they threat intermediaries in traditional product-ownership value systems. Mobile PPS providers substitute location-based PPS resources of physical dealers. Due to alternative PPS resource providers and emergence of alternative distribution channels, the dependence of producers on dealers decreases. This stimulates producers to sell directly to consumers.
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No Internet Stage 1: Advent of the Internet Stage 2: Advent of E-Bikes Stage 3: Entry other PPS Providers
Value System Figure
Findings
a. Producers Product Flow
High resource intensiveness of establishing a physical distribution network deters producers to integrate product distribution. Pro- ducers therefore fully outsource selling to physical dealers.
E-commerce enabled entry of new producers which sell solely directly via webstores.
Incumbent producers are getting more involved in the selling process; producers use their websites to display products. Similar to online dealers, producers intent to bypass intermediated distribution channels but their dependence on physical dealers for current sales hinders them to do so. Some producers experiment with direct online selling, however, are forced to deliver products via physical dealers to prevent inter-channel conflicts.
The advent of E-Bikes causes new entry of fully integrated producers that bypass both online and physical dealers.
The advent of E-Bikes leads to a shift from e-commerce to physical e-commerce and reduces the intention of producers to bypass physical dealers via direct online selling channels. Buyers of E-Bikes have a higher need to experience products before purchasing. Moreover, the advent of E-Bikes increases the need for PPSs and makes the ability to offer these services more important for selling. As a result, physical dealers re-establish their dominant position as product resellers. To limit risk of conflicts with physical dealer networks, producers remain to use webstores and showrooms complementary to dealer channels; producers steer consumers to physical dealers for product delivery.
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No Internet Stage 1: Advent of the Internet Stage 2: Advent of E-Bikes Stage 3: Entry other PPS Providers PPS Flow Because of the relative low
need for PPS, high resource intensiveness to establish a local presence and the ability of physical dealers to offer these services, producers fully outsource the provision of PPS to physical dealers.
Idem stage 1. Fully integrated producers bypass physical dealers in the provision of PPSs. Further, producers that sell solely via their webstores contract physical dealers for repair service. Furthermore, producers with physical dealer networks remain to rely on physical dealers for the provision of PPS as they are unable to bypass them in the product distribution phase. Because product experience and PPS have become more important, these producers have become more involved in the provisioning of these services and have become more selective about their physical dealer network.
For direct online distribution, producers will use mobile PPS providers to provide consumers with repair service. In indirect physical distribution channels, producers will remain to rely on physical dealers for PPS. Further, the use of IoT for predictive maintenance and breakdown service enables producers to be involved in the provision of these services; instead of facilitating consumers with external repair service points, produces can steer how the service is delivered to consumers. This will likely help mobile PPS providers to establish themselves in the market.
b. Physical Dealers
Product Flow
Physical dealers have a dominant position in selling. The need for PPSs has a low impact on their position as resellers.
Resources to physically sell and provide PPSs proves to be insufficient to prevent online dealers from entering the market. Physical dealers lose market share to online dealers.
The advent of E-Bikes makes resources to physically sell and provide local repair service more valuable. Therefore, it enables incumbent intermediaries to recapture market share lost to online dealers and to reduce the threat of integrated online distribution channels. On the other hand, physical stores of online dealers pose a new threat to physical dealers.
With the emergence of other distribution channels and PPS substitutes, physical dealers face the threat of substitution. Moreover, they face the threat of disintermediation due to vertical integration. Since leasing companies offer a financial service, their emergence may not necessarily lead to disintermediation; leasing companies might use physical dealers as intermediaries and offer their products and/or arrange repair service via these dealers.
PPS Flow Because of their local presence, physical dealers are the main providers of PPSs.
Due the lack of alternative PPS providers, physical dealers remain to be the main providers of PPSs.
Physical dealers remain the main provider of PPSs. Online dealers try contract physical dealers to function as local repair service points and compete over PPS because they also offer repair service in their own stores. Integrated producers substitute physical dealers within value systems.
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No Internet Stage 1: Advent of the Internet Stage 2: Advent of E-Bikes Stage 3: Entry other PPS Providers c. Online
Dealers
Product Flow
n.a.
Online dealers penetrate the market with a low-price strategy and capture market share from physical dealers. The inability of online dealers provide local PPS does not hinder them to sell.
Due to the increased desire of buyers to experience products before buying, online dealers open physical stores. Further, as producers enlarge their online presence and use their websites for selling, online dealers face the threat disintermediation.
Online dealers face the threat of disintermediation. As the emergence of substitute PPS providers enable producers integrate online selling, producers will try to push online dealers from value systems
PPS Flow
n.a.
Due to the inability of online dealers to provide local PPS themselves and the lack of other PPS providers, online dealers rely on physical dealers for the provision of repair service. Due to the relative low need for PPSs, the need for PPS has a limited impact on their ability to establish themselves in the market.
Due to the increased need for PPSs and the grown importance of PPS for product selling, online dealers take up a more prominent role in the facilitation of repair service; they contract physical dealers for repair service and/or provide these services at their physical stores.
Online dealers may use mobile PPS providers to facilitate the provisioning of PPSs.
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Theoretical Implications
With regard to the theoretical usefulness of this research, interesting insights have been discovered. Christensen (1997) suggested, digital disruption favours new entrants, that will ultimately replace incumbents that are inert or incapable to adapt to change. However, this study opposes this assertion of Christensen and fits well to other studies suggesting that the disruptive impact of digitalisation on value systems depends on the ability of incumbent intermediaries to defend themselves with existing resources (e.g. Broekhuizen et al., 2013; Chircu & Kauffman, 2000). Besides this affirmation, findings also present several novel insights. Firstly, the extent to which PPS needs affect the digital transformation of value systems depends on the extent to which these services are needed. According to findings, the need for PPSs has to be sufficiently high in order to affect the digital transformation value systems. A low need for PPSs may not enable incumbent intermediaries to leverage PPS resources as a protective barrier against entry of digital intermediaries and digital integration of product distribution channels. This leads to the following proposition:
Proposition 1: The extent to which the need for PPS affect the digital transformation of value systems depends on the extent to which these services are needed.
Findings contradict the prevailing view that the digital transformation of value systems is a static process. Evidence portrait the digital transformation of value systems as a dynamic process; technical advancements of products and changes in product consumption can empower incumbent intermediaries as they can increase the need for PPSs. The emergence of e-commerce can initially disrupt incumbent intermediaries. However, when the value of their PPS resources increases they might be able recapture market share and cause a shift from e-commerce to physical commerce. This leads to the following proposition:
Proposition 2: Digital transformation of value systems is a dynamic process; the extent to which activities in value systems are digital can increase and decrease.
Over time, new entrants may emerge and offer substitute PPS resources and alternative distribution channels. Further, new technologies may emerge and decrease the dependence of producers on the resources of incumbent intermediaries. Emergence of substitutes PPS resources and a decreasing dependence of producers on PPS resources of dealers may erode the ability of incumbent intermediaries to use PPS resources to protect themselves against digital disruption. This leads to the following proposition:
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Managerial Implications
Companies with products that require repair and maintenance service should carefully consider how the need for PPSs affects the digital transformation of their value system. They should not limit their focus on the expansion of e-commerce but also consider the impact of product development, changing product consumption and the advent of new digital technologies on the value of the PPS resources within their industry. Producers should expand their view and seek collaboration with alternative (substitute) intermediaries because distributing exclusive via physical dealers creates a great dependency; if other value system configurations emerge, it may limit them to change and take advantage of new opportunities. Moreover, they should investigate how IoT may help to decrease their dependence on PPS resources of physical dealers. Physical dealers should reconsider their strategy. Findings indicate that physical dealers should either provide substitute resources themselves or make producers more dependent on their resources. To increase the dependence, they could increase the collaboration in the provisioning of PPSs. Physical dealers could collaborate with producers for the development of predictive maintenance service, make relation specific investments and therefore make it harder for producers to remove or supplement physical dealer networks with other distribution channels. Further, physical dealers could make their resources more valuable. For example, they could make their services less generic and distinguish themselves by tightening customer-relational ties, providing other complementary services or offering loyalty programs. Online dealers should be aware that their position as online resellers may be difficult to maintain. Entry of intermediaries that offer products as a service and emergence of other PPS providers could weaken the dependence of producers on the resources of physical dealers, which may entice producers to bypass distribution channels of online dealers and to vertically integrate online selling. To withstand this threat, online dealers should make their resources more valuable; producers should become more dependent on their resources or online dealers should add more value by offering other complementary services.
Research Limitations and Future Research
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Netherlands has a fine-grained network of physical dealers, consumers do not have to travel a long distance visit physical dealers. Webstores might therefore have less of an advantage in The Netherlands in comparison to countries where consumers need to travel a longer distance to visit physical dealers. Future research should assess how travel distance affects the impact of PPS needs on the digital transformation of value systems. A third limitation is the retrospective nature of the interviews held. Because the object of research entails a transformation process, this research has tried to establish to adequately reconstruct timelines by conducting interviews. Respondents might have given their (possibly biased) retrospective view of the impact of digitization. Therefore, future research should collect longitudinal interview data to limit for this bias. Lastly, value systems in the bicycle market are still in the process of digital transformation. Although findings present interesting insights it could be useful to conduct a similar research when more dominant structures of value systems in the bicycle market have emerged.
Conclusion
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