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International Journal of Information Management 25 (2005) 137149


www.elsevier.com/locate/ijinfomgt

Online business: tailoring your business environment in order to compete


Muammer Ozer
Department of Management, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon, Hong Kong

Abstract Companies have been trying to establish a presence on the fast-growing Internet in order to be more competitive. At the same time, the Internet business environment is becoming increasingly complex and uncertain. This paper presents a conceptual model for the success of online businesses based on the literatures in information management, product innovation, and strategic management. It should be useful for researchers to develop and test research hypotheses and for practitioners to manage their online business more effectively. r 2004 Elsevier Ltd. All rights reserved.
Keywords: Online business; Competitive advantage; Business environment; Internet

1. Introduction Online businesses need to operate within an uncertain and multifaceted legal system, compete with highly capable competitors, keep up with rapidly changing technologies, and respond to emerging social and cultural demands. Given the highly dynamic and uncertain nature of the Internet environment, it has not been a big surprise to witness the failure of a large number of online initiatives soon after their market introduction. Past literature offers a great number of studies in the area of ebusiness (Viborg-Andersen, Elliot, Swatman, Trauth, & Bjorn-Andersen, 2003; Weill & Vitale, 2001). Despite the large number of earlier studies, there are also calls for more research in the area, which will
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E-mail address: mgozer@cityu.edu.hk (M. Ozer). 0268-4012/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.ijinfomgt.2004.10.003

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integrate multiple disciplines into a single study and offer a holistic view of e-business (Clarke, 2003; Lichtenstein & Swatman, 2003). This paper responds to this call and signicantly extends the previous literature by integrating prominent theories in disciplines such as information management, product innovation, and strategic management and presenting a conceptual model for the success of online businesses. Moreover, it incorporates the impacts of such external factors as legal, competitive, technological, as well as social and cultural environments into the model. As Fig. 1 shows a successful online business, rst, collects and uses relevant business intelligence; second, it offers superior products/services; third, it capitalizes on its technological competencies; fourth, it involves a exible approach; fth, it is well integrated with the other functions of the rm; and nally, it takes advantage of relationships with suppliers, distributors, customers, and other complementary businesses. Fig. 1 also suggests that different legal, competitive, technological, as well as social and cultural environments moderate the impacts of these factors on the success of an online business. This paper uses a large number of examples from business publications in order to give substance to the model. The elements of the model, their impacts on the success of an online business and their potential pitfalls are discussed. Then, attention is focussed on the moderating roles of different legal, competitive, technological, and social and cultural environments in the success of an online business. After that, the differential impacts of the factors on brick and mortar and born digital companies are highlighted. The paper concludes with suggestions of some managerial and research implications. 2. Business intelligence The information processing view of the rm suggests that, in rapidly changing environments, rms will need more rather than less market information (Galbraith, 1974). Furthermore,
Business Intelligence Product/Service Superiority LEGAL ENVIRONMENT COMPETITIVE ENVIRONMENT

Technological Competence

SUCCESSFUL ON LINE BUSINESS

Flexibility

Integrated Strategies TECHNOLOGICAL ENVIRONMENT SOCIAL AND CULTURAL ENV.

Relationships

Fig. 1. A framework for the success of online businesses.

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numerous studies have also argued that rms abilities to collect from the environment information that their competitors overlook can be fundamentally important for them to enhance the success of their business (Porter & Miller, 1985; Frishammar, 2002). Online businesses should also benet from business intelligence so as to enhance their performance. In fact, successful online rms gather market information to design their online offerings. For instance, Friends United in the UK observed that people want to be part of a community and thus set up an online service bringing old school friends together and thereby attracting 8.5 million members (Wall, 2003). Similarly, an online bookmaker, Sporttingbet, started to offer online betting services after observing the Internets potential to reach lucrative markets in Asia. It is expected to generate more than 1.2 billion in revenues (Wall, 2003). Firms also gather intelligence to reinvent themselves, as reected in Yahoos recent re-focus of its business. Based on market trends, the company restructured its revenue generation strategies, reducing its reliance on Internet advertisements and focusing more on premium subscription services. The company reported earnings of $43 million in 2002 compared to a loss of $93 million in 2001 (Taylor, 2003). Collecting and using business intelligence is obviously important for online businesses. However, they should also keep in mind that information about the Internet may be unreliable due to its highly dynamic and uncertain nature. Many predictions about the Internet have been proven wrong in a short period of time (Jaffe, 2003). Hence, companies need to assess the quality of the intelligence that they collect and possibly use multiple sources to cross-validate it and to enhance its reliability.

3. Product/service superiority The success of a new offering depends on the added value that it provides to its end users. Indeed, Cooper (1996) showed that one of the top success factors for new products was delivering a relatively superior product. Similarly, de Brentani and Ragot (1996) also found that product superiority was the most important determinant of success of new services. Numerous other studies have also shown that relative product superiority is positively related to rms competitive advantage and success (Calantone, Schmidt, & Song, 1996; Song & Parry, 1997). It follows that online businesses can attract people to their websites only when they offer a superior product or service. Indeed, it has been argued that a small New Zealand rm, Rhinestonz.com.nz, has achieved a great success by selling rhinestones online because many people could not get them anywhere else (ORourke, 2003). This distinct value has allowed it to generate nearly 70% of its business from international customers compared to around 10% that it had before going online. On the other hand, the spectacular failure of Boo.com in the UK has been attributed to its huge spending on TV ads without offering much to its customers (Gibson, 2003). Despite the obvious importance of product/service superiority, many online businesses have not yet paid the necessary attention to this area. For example, a recent consultation of several online sites indicates that they have not been carefully designed. For instance, an online credit card business (marbles.com) only accepted information in a certain format, but did not specify the format for its customers; and another online credit card rm (egg.com) did not accept post ofce

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box numbers as an address in its online forms. Thus, one had to call these companies to complete their transactions (Bowen, 2003a). These examples suggest that when people need more expediency they might visit other sites that are more exible and convenient. Product/service superiority is very important for the success of an online business, and intense competition requires rms to continuously reinvent and improve their online business to survive. In fact, published reports suggest that many successful online businesses such as Yahoo (Taylor, 2003), eBay (Wingeld & Lundegaard, 2003), and Google (Markoff & Zachary, 2003a) have not only offered superior products but also constantly reinvented themselves and hence been able to remain successful for a long time.

4. Technological competence As online businesses heavily depend on technology, rms need to have the necessary technical capabilities to function. Both the transaction-cost and the resource-based theories suggest that rms need to have technological competencies in order to be successful. The transaction cost theory implies that technological competencies help rms achieve operational efciencies and thus give them competitive advantages that otherwise cannot be obtained (Afuah, 2003). On the other hand, the resource-based theory suggests that rms technological capabilities along with other resources provide them a competitive advantage and thus make them more successful (Bharadwaj, 2000). Indeed, technology has been instrumental in the success of a large number of online businesses in a wide range of areas, including online auctions (Wingeld & Lundegaard, 2003); banks (Grant, 2003); groceries (Ody, 2003); retailers (Hanrahan, 2003); and search engines (Markoff, & Zachary, 2003a). Despite the importance of technology in the success of an online business, rms should not overlook the human aspect of their operations. For instance, Northwestern Mutual Financial Services uses the Internet heavily in its business. At the same time, the company is very cognizant of the fact that technology is not a substitute for working with a client, but is merely a tool to build and enhance buyerseller relationships (Ruquet, 2003). It follows that companies can increase their success if they take into account the human aspects of the technology in their online initiatives.

5. Flexibility Flexibility can help companies in two signicant ways: rst, it enables rms to use their resources in multiple settings and thus creates additional resources. Second, it allows them to coordinate their activities through more effective and efcient redenition of their strategies as well as reconguration and redeployment of their resources (Sanchez, 1995). These two factors in turn reduce the cost, time, and difculty of changing the mix and use of company resources. As suggested by the resource-based and the transaction-cost theories, additional resources and reduced costs can enhance companies competitiveness and hence their success. Because of the highly dynamic nature of the Internet environment, rms are expected to be more successful when they follow exible strategies, adapting them to the rapidly changing

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requirements of the marketplace. In a detailed investigation of the role of exibility in online business, Ozer (2002) argued that todays market conditions require online businesses to take a holistic view of exibility instead of just emphasizing the customization and personalization aspects of an online business. To do this, they have to try to enhance the exibility of their business through the different functional aspects of their business, including technology, human resources, operations, marketing, nance, and management. Flexibility can undoubtedly help rms cope with the changing needs of the environment. However, they still need to insert some control measures into their operations in order to ensure quality. For instance, online search engines allow people to search the Internet by name, subject, region, product type, and price and thus are highly exible. However, the services provided by such rms may not be of high quality. A recent search in a popular online search engine generated 3,060,000 results, seriously overwhelming people with information (Bowen, 2003b). Consequently, it is imperative for companies to maintain the quality of their products and services while pursuing exibility.

6. Integrated strategies An integrated approach can help a rm achieve a common frame of reference among its activities and better deploy its resources to achieve their objectives (Henderson & Sifonis, 1988; Teo & King, 1996). In the area of information systems planning, for instance, Teo and King (1996) found that rms achieved a higher organizational performance when their business and information system planning were integrated. They also showed that the integration had a negative relationship with the extent of organizational, implementation, database, and hardware problems. In the area of ofce automation, it was also shown that rms with a higher degree of integration in their ofce information systems had more successful systems (Law & Gorla, 1996). Because of the interaction of an online business with such back-ofce functions as purchasing and manufacturing, and with such front-ofce activities as warehousing and delivering, it is expected that online businesses can enhance their performance if they integrate their online initiatives with the rest of their business. Moreover, because an integrated approach requires rms to focus on the whole business instead of a single function, they can benet from an integrated strategy more, as they can respond to the requirements of different market conditions better. Amazon.com, eBay, and Expedia are generating annual sales in access of $1 billion each while many online businesses have failed (Nairn, 2003). The success of these businesses can be partially explained by their ability to integrate their online businesses with their ofine support functions. However, implementing an integrated strategy can be rather challenging. In order to successfully integrate an online business with other functions, companies need to adopt software that can be implemented across different systems and across different organizational structures (Breyer, 2003). Furthermore, there is a lack of industry standards stipulating how different software applications communicate in terms of messaging formats, session management, and data exchanges (Brown & Sappeneld, 2003). There is also the human side of integration, suggesting that companies need to make sure that people involved in the process share and support the integrated strategies (Ruquet, 2003).

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7. Relationships Building relationships inside and outside a rm has been recognized as one of the key success factors for rms based on widely adopted transaction-cost and resource-based theories. While the former theory postulates that rms in a business relationship can combine their unique resources and thus create better efciencies, the latter suggests that rms in such relationships can access resources that they do not have and hence gain more competitive advantage. Thus, the impact of such relationships on a rms success will be highlighted in market environments where these sorts of efciencies and additional resources are relevant. As online businesses rely heavily on other supporting parties, building relationships with them is also important. An online rms success depends on the effectiveness of its supply and distribution systems. Unless such systems are reliable, the rms online initiatives may not survive. The importance of building relationships with capable suppliers is illustrated in a recent case that showed that although many of its earlier high-prole counterparts failed, Ocado, a major online grocery store in the UK, is successfully generating around 100 million in annual revenues. This success has been partially attributed to its close relationship with a reliable wholesale grocery supplier, Waitrose (Ody, 2003). Building relationships with distributors can also enhance the success of an online business. Many online rms assumed that the biggest challenge was attracting customers when, in fact, the most demanding test was fullling the orders. Moreover, people are increasingly demanding realtime information about product availability and shipment status. In response, successful rms either build their own warehouses or establish good working relationships with third parties to increase the effectiveness of their delivery systems. For instance, Ocado, the UK-based online grocery store mentioned above, uses its own system (Ody, 2003), whereas Home Depot, J.C. Penney, Nortel Networks, Sun Microsystems, and Wal-Mart utilize independent distributors (Smith, 2003). Recent advances in Internet technologies allow successful rms to build relationships with their customers as well. For example, Fingerhut Companies, Inc., a mail order company, has made substantial investments in customer relationship management tools in order to determine why, when, and how its customers contact them and to prepare and deliver personal messages, loyalty programs and special offerings through the most appropriate channels (Ragins & Greco, 2003). Successful rms also try to build relationships with complementary businesses in order to increase their market reach. The importance of forming such relationships has been highlighted in a recent partnership between British Telecom (BT) and Lastminute.com. In this relationship, the users of BTs Internet Kiosks can reach the Lastminute.com and can take advantage of numerous promotional offers that are exclusively available to them to rent DVDs. Consequently, BT can successfully enhance the attractiveness of its Kiosks and Lastminute.com can access a large number of potential customers through the BTs Kiosk network (BT ties up with Lastminute.com, 2003). While many companies have successfully built and maintained relationships with others, there are many companies still struggling to implement relationship-based strategies. For example, it was reported that up to 42% of top-ranked websites took longer than 5 days to respond to a customer inquiry, did not accept e-mail messages or never responded to e-mail messages at all (Ragins & Greco, 2003). This suggests that building relationships with others is not about merely

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using some relationship software, but is more about a strategic mindset to fulll the requirements of such relationships.

8. Moderating market conditions 8.1. The legal environment Extensive studies have been conducted to adapt existing laws to online business in the areas of copyright protection, privacy, deceptive business practices, protection of children, online contracts, digital signatures, tariffs and taxations, and cyber-crimes (Cordy, 2003). The success of online rms depends on their understanding of related regulations and their ability to offer online products and services based on this understanding. Firms can also follow exible strategies so as to lessen the negative impacts of regulations on their business. For example, while many online car-sellers failed because they tried to sell cars online in states where state laws prohibited direct sales by out-of state-rms, autobytel.com, carsdirect.com, and autotrader.com have adopted such exible strategies as dealer referral and listing of cars for sale and achieved success (Keefe, 2003). In highly regulated industries including online gambling, music, pharmaceutical, and nancialservices industries, online businesses build technological competencies such as geolocation services and integrate them into their websites to enhance their success. These services enable an online business to determine the physical location of individual users and to prevent someone from engaging in illegal transactions (The revenge of geography, 2003). Consequently, these businesses can fulll the requirements of their legal environments and thus be more successful. Finally, companies can form relationships with other rms in order to reduce the limiting impacts of regulations. In the music industry, for instance, major recording companies have formed the Recording Industry Association of America to ght online music piracy, and the association is now asking the ofcials of major universities to stop illegal music sharing on campus (Newman, 2003). In another case, AOL Time Warner is building a relationship with a Chinese PC manufacturer, Legend Holdings, to enter Chinas Internet market where current regulations limit the amount of foreign ownership (AOL Time Warner, 2003). As these cases suggest, relationships can help rms improve the prosperity of their online businesses in loosely or highly regulated market environments. 8.2. The competitive environment Firms need to collect business intelligence from their markets and offer superior products and services so as to maintain their competitiveness. In the highly competitive mortgage lending industry, DeepGreen Bank of Ohio, USA, for instance, focuses on what people want from an online mortgage lender, including a fast transaction, unconditional decisions and the ability to complete the entire transaction online. These distinct characteristics have helped the bank generate around $1.25 billion in annual revenues (Grant, 2003). Similarly, rms can enhance their competitiveness by investing in technological competencies as in the case of Google whose success

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is widely attributed to its investments in hardware and software development (Markoff, & Zachary, 2003a). As discussed earlier, exibility and integrated strategies can also increase the success of online businesses in competitive environments. The importance of exibility is highlighted in the case of Staples, Inc. that offers its customers the exibility to shop from its online and ofine stores, to pick-up and return items purchased online, and to order online but make payments in stores in case they wish not to use their credit cards in online transactions (Hanrahan, 2003). Similarly, the importance of integrated strategies in competitive markets is shown in the case of QVC, Inc., a major-home shopping rm, which uses an integrated distribution system called drop-shipping. With the system, as soon as a customer places an order on its website, the order is relayed to one of its 180 worldwide drop-shippers including manufacturers and distributors, which then ship the ordered items directly to the customers. Given that it offers nearly a million different items through its website, its close integration with the drop-shippers enables the rm to have the ordered items delivered to the customers on time and thus to enhance its competitiveness (Fuscaldo, 2003). In competitive environments, a single rms resources may not be enough to combat the competition, but partnering with another rm can enhance the capabilities of both rms and hence their success. eBay, for instance, has partnered with EachNet.com to expand its business in China. The partnership generates more than $1.8 million a year based on the local knowledge of EachNet.com and the technological and business expertise of eBay (Chang, 2003). We can see that neither of the rms could have achieved this success without the help of its partner in such a unique competitive market environment.

8.3. The technological environment Technological changes in the environment affect rms differently, as not all use the same technology. Online retailers, for instance, would be more interested in Internet security technologies, whereas rms using the Internet merely for public relations purposes would not be so concerned about secure online transactions. Therefore, business intelligence about the technological environment will enable rms to identify their technological needs, to determine alternative technologies to fulll them and to invest in more relevant technologies. Advanced technologies can help rms maintain the superiority of their products and services. Firms that are interested in enhancing their technological capabilities can easily acquire related technologies from the marketplace. This ready availability of relevant technologies, however, means that rms may not be able to achieve success by merely having the technology, but can only do so by strategically using it. Indeed, while many online used car dealerships failed after concluding that people were not interested in buying used cars online without a test drive, eBay Motors made about $100 million in revenues from used car sales through its website in 2002. The companys success was partially attributed to its strategy that allows people to rate the dealers and to offer car buyers free purchase insurance (Wingeld & Lundegaard, 2003). The Internet technology used by eBay Motors is more or less available to every rm. However, what makes eBay Motors more successful compared to its rivals is its ability to use the technology in this competitive way.

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Firms can also achieve success by taking advantage of the exibilities that available technologies offer to them. Numerous examples show how rms utilize such exibilities: For example, online nancial institutions use the technologies to offer more customized services (Knight & Knight, 2003); online retailers use online technologies to test their new products (Ozer, 2003); and online search engines take advantage of the latest technologies to link the advertising messages on their websites to specic searches and show them to the most relevant audience (Markoff, & Zachary, 2003b). Firms also build relationships with other capable rms to keep up with the rapid changes in the technological environment. For instance, Walt Disney intends to use Googles search capabilities on its online sites to allow visitors to its websites to conduct related searches. This will help Walt Disney enhance its customer service without making major technological investments (Disney expands, 2003).

8.4. Social and cultural environments Online businesses should also take into account their social and cultural environments. First of all, depending on the social and cultural environments in which companies operate, their intelligence needs will be different. For instance, in the online gaming industry, SONY discovered that while Asians preferred more group-oriented games Americans favored games that are based on one-on-one competitions. Because of this intelligence, SONY is developing new online games tailored to players in Asia (Kim, 2003). Thus, rms need to collect business intelligence about the social and cultural differences in their target markets in order to develop superior products and services. Many social and cultural factors can affect the success of an online business. For example, online retailers have noted that people were reluctant to give out personal details online. In response, Amazon.com has invested in security technologies and started to inform the buyers about the security and privacy of information collected through its websites (Privacy notice, 2003). Here, we see technological competence being instrumental in addressing some of the sensitivities of the social and cultural environments, and thus enhancing the success of an online business. Flexibility can also be relevant in social and cultural environments that require localized services. For example, successful online nancial institutions use multilingual websites in order to enhance their success (Bruno, 2003). It is the exibility of those rms in offering socially and culturally sensitive products and services that has been considered to be one of the important reasons behind their success. Integrated strategies can also be useful in different social and cultural contexts. For example, online sales of fashion items have been rather slow due to the reluctance of people to buy such items without visiting a store. Realizing these social and cultural facts, Lane Bryant, a womens apparel retailer in the US, does not push for online sales, but integrates its online businesses with its marketing strategies to attract customers to its physical stores, thereby creating $21 million additional sales in its physical stores (Nairn, 2003). It follows that an online business does not need to generate revenues in order to be successful, but can help rms achieve their goals by supporting other company strategies.

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Relationships can also be relevant in different social and cultural contexts. For example, people living in the West value expert opinions. Hence, building relationships with industry experts in such a social and cultural environments can be instrumental in achieving success on the Internet. In the fashion industry, for instance, people usually want to touch and feel a fabric and see its actual color, which can be quite difcult to present in a computer monitor. Thus, Worth Global Style Network, a fashion news provider, is working with numerous industry specialists to provide authoritative descriptions of such features (About WGSN, 2003).

9. The differential impacts of the factors on brick and mortar and born digital companies Because brick and mortar companies (BMCs) have their traditional ways of doing business, their online extensions will usually require them to invest in necessary Internet technologies (Chan & Pollard, 2003), to adapt their business to the online environment (Kanter, 2001) and to align their online and ofine operations and strategies more than born digital companies (BDCs) (Chang, Jackson, & Grover, 2003). Furthermore, because of their established brand names, marketing capabilities and relationships with their suppliers, they can usually enjoy signicant cost and marketing advantages over BDCs (Chan & Pollard, 2003). Consequently, with regard to business intelligence, while BDCs will be more interested in knowing what types of products and services to offer, BMCs will be more interested in understanding how to extend their ofine business to online settings. The impact of product/service superiority will be more pronounced for BDCs compared to BMCs, as BDCs are relatively less known. With regard to technological competence, BMCs will need to invest in related technologies more, as BDCs are likely to be more technologically competent than BMCs. The importance of exibility will be more highlighted for BMCs, as these traditional companies need to make signicant changes in their current operations. With respect to integrated strategies, BDCs will need to create more supporting back-ofce functions compared to BMCs, as BMCs will already have them in place. Finally, with regard to relationships, BDCs will again need to invest more in such relationships compared to BMCs, as BMCs will already have established relationships. Market conditions can also impact BMCs and BDCs. The legal environment will affect them equally, as they all need to follow the regulations. In terms of the competitive environment, BDCs will need to create a new market for their business while BMCs will need to extend their ofine business to the online arena. With respect to the technological environment, because BMCs will usually be less technologically competent than BDCs they will need to understand the changes in the environment more and possibly partner with other technologically capable rms. Finally, with regard to the social and cultural environment, while BDCs will need to be cognizant of the social and cultural sensitivities of their target customers, BMCs will need to pay attention to the social and cultural characteristics of their both ofine and online customers.

10. Conclusion This paper has shown that the performance of an online business may depend on its ability to collect and use business intelligence, deliver superior products/services, maintain a technological

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competence, use exible strategies, integrate the online business with the other functions in the rm, and to build relationships with suppliers, distributors, customers, and other complementary businesses. The paper has also suggested that rms need to pay attention to potential pitfalls associated with these factors. Namely, rms rst need to emphasize quality when gathering business intelligence. In addition, as the Internet changes so rapidly, todays superior products/ services might not be seen as such tomorrow unless rms constantly improve them. Furthermore, rms need to establish a balance between technological competence and the human aspects of the technology to be more competitive. There is, moreover, a danger of following exible strategies while overlooking the control and quality aspects of an online business. Besides, when rms try to integrate their online businesses with the other functions in the rm, they need to ensure that their online strategies are shared and supported by the whole rm. Finally, the success of building relationships with others depends on the capabilities of the parties involved and their willingness to support such associations. The framework presented in this paper may offer insights to managers, Internet consultants, webmasters, and people who design and maintain Internet sites for companies. As the Internet environment becomes more and more complex and uncertain, understanding the numerous elements affecting the success of online businesses can help them consider relevant factors and thus improve the quality of their strategic decisions. This study is, however, just one attempt to identify factors affecting the success of online businesses. There could well be other factors and future studies to investigate them.

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Muammer Ozer is an associate Professor at the City University of Hong Kong. He holds BS and MS degrees in Engineering from the Istanbul Technical University and a Ph.D. degree in Business Administration from the University of Pittsburgh. His papers in the areas of information technology, technology management and the interface between information technology and new product development have appeared in a number of leading international journals.