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Enterprise Information Systems

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Measuring the performance of Internet companies using a two-stage data envelopment analysis model
Xiongfei Cao & Feng Yang
a a b

USTC-CityU Joint Advanced Research Center, University of Science and Technology of China, City University of Hong Kong, Suzhou, 215123, China
b

School of Management, University of Science and Technology of China, Hefei, 230026, China Published online: 25 Jan 2011.

To cite this article: Xiongfei Cao & Feng Yang (2011) Measuring the performance of Internet companies using a two-stage data envelopment analysis model, Enterprise Information Systems, 5:2, 207-217, DOI: 10.1080/17517575.2010.528039 To link to this article: http://dx.doi.org/10.1080/17517575.2010.528039

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Enterprise Information Systems Vol. 5, No. 2, May 2011, 207217

Measuring the performance of Internet companies using a two-stage data envelopment analysis model
Xiongfei Caoa and Feng Yangb*
a

USTC-CityU Joint Advanced Research Center, University of Science and Technology of China, City University of Hong Kong, Suzhou 215123, China; bSchool of Management, University of Science and Technology of China, Hefei 230026, China (Received 15 September 2009; nal version received 28 September 2010)

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In exploring the business operation of Internet companies, few researchers have used data envelopment analysis (DEA) to evaluate their performance. Since the Internet companies have a two-stage production process: marketability and protability, this study employs a relational two-stage DEA model to assess the eciency of the 40 dot com rms. The results show that our model performs better in measuring eciency, and is able to discriminate the causes of ineciency, thus helping business management to be more eective through providing more guidance to business performance improvement. Keywords: Internet companies; eciency; data envelopment analysis (DEA); performance measurement; two-stage production process; e-business; enterprise information systems

1.

Introduction

The Internet is reshaping the business operation pattern with its unprecedented growth and application (Hsu and Wallace 2007). The explosion of the Internet has aected many facets of industrial sectors and an Internet-enabled enterprise resource planning (ERP) is crucial to the continuous development of an enterprise (Ng and Ip 2003). As such, enterprise information systems are closely related to the Internet, and this trend is making the boundaries of enterprise information systems even more broader (Wang et al. 2010). As Internet has become a powerful communication mechanism to facilitate the processing of business transactions, in the past decades, there has been a rapid development of Internet companies in both scale and quantity. This rising tendency has resulted in a need for evaluating the performance of dot com rms, which aects the survival of such companies. In evaluating Internet companies, the existing studies focused primarily on a single variable or a small collection of nancial ratios such as return on investment (ROI), return on equity (ROE) while ignoring the non-nancial information in Internet industry. Although the ratio analysis provides useful information, they only portray one facet of performance. Without the help of supporting non-nancial information, nancial information might be insucient for judging an online business. Moreover, there are many factors related to a dot com rms performance such as assets, expense,

*Corresponding author. Email: fengyang@ustc.edu.cn

ISSN 1751-7575 print/ISSN 1751-7583 online 2011 Taylor & Francis DOI: 10.1080/17517575.2010.528039 http://www.informaworld.com

208

X. Cao and F. Yang

number of employees and visitors, etc. Therefore, it is necessary to assess the performance of dot com rms in a multidimensional systems perspective. A small number of studies (Barua et al. 2004, Serrano-Cinca et al. 2005, Ho 2010) have been conducted to evaluate Internet companies using data envelopment analysis (DEA). DEA is a linear programming technique used to evaluate the eciency of decisionmaking units (DMUs) on the basis of their multiple inputs and outputs (Butler and Li 2005). The major advantage of DEA is that it does not need a priori assumption on the function form characterising the relationships between the input and output variables. As web metrics have become an eective measurement for assessing a companys Internet prole, Serrano-Cinca et al. (2005) were the rst to attempt to apply DEA to combine nancial data and web metrics to measure the performance of Internet companies. They employed a classic CCR model to calculate the eciency of 40 companies, and obtained a ranking of these rms in terms of relative eciency. However, the original DEA model considers each DMU as a black box and neglecting internal linking activities, i.e. every variable should belong to either input or output, and intermediate products are ignored. Such approach provides no discernment regarding the location of ineciency and is unable to provide specic guidance to decision makers to improve the DMUs eciency (Sexton and Lewis 2003). Besides, the real performance of Internet rms may be overvalued. When a complex production process is concerned, a precise model is needed (Xu et al. 2005, 2007). The production process of an Internet rm can be viewed as a twostage process: using both labour and capital to attract visitors which, in turn, bring revenue to the company. It can be seen that visitors serve as intermediate factors since they are outputs from the rst stage and inputs to the second stage. In the past research, visitors are grouped with outputs as well as revenue, a grouping which can be considered as inappropriate. In this study, we employ the relational two-stage DEA model proposed by Kao and Huang (2008) to imitate the dot com rms operation process, where the complex production process is decomposed into two sub-processes. Accordingly, the overall eciency is decomposed into the product of the eciencies of two sub-stages, thereby helping managers identify inecient areas for improvement purpose. The rest of the article is structured as follows. First, we describe the production process of Internet rms and introduce the model of relational two-stage DEA. Next, we calculate the eciency of Internet rms, and discuss the results. Finally, conclusions are drawn and directions for future research are given. 2. Research methodology The production process of a dot com rm can be decomposed into a two-stage process: marketability and protability. The former is characterised by marketing of the website, while the latter is characterised by earning revenues. In a competitive market situation, the management hopes to attract more visitors in the rst stage under given resource inputs. As such, they would like pursue more revenues in the second stage. In other words, an ecient dot com rm will, with little input, obtain high levels of output. The inputs and outputs of the system described in Serrano-Cinca et al. (2005) are: Input A: Number of employees Input B: Total operating expenses

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Enterprise Information Systems Input C: Total assets Output 1: Unique visitors Output 2: Revenues

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In their analysis, unique visitors are grouped with outputs, since achieving a high number of unique visitors is taken as an objective of the same magnitude as achieving high revenues (Serrano-Cinca et al. 2005). However, the overall goal of Internet companies is to obtain revenues. Some rms overestimate the Internet impact, ignoring the expenditures in order to achieve high market occupancy. It can then be argued that the importance of web metrics is exaggerated, since visitors do not always become customers. Many dot com rms failed in part because they spent millions of dollars to build brand awareness and acquire visitors, but not able to convert expenditures into actual revenues. Notably, impact in the Internet and revenues is an independent concept, which has been proved by the study of SerranoCinca et al. (2005). Furthermore, only visitors can become customers in the Internet. With regard to the sequence in emergence, visitors emerge, followed by revenues. Some researchers have used web metrics to forecast the revenues of Internet rms. Therefore, we have reasons to classify unique visitors as an intermediate product; they are outputs from the stage of marketability and inputs to the stage of protability. To match and extend Serrano-Cinca et al.s analysis to a complicated production process, the current study adopts the variables based on their original work. Figure 1 describes the Internet rm production process. DEA is a linear programming technique used to evaluate the eciency of a set of peer DMUs. Under the assumption of constant returns to scale, the eciency score of DMU k can be computed using the following CCR model (Charnes 1978), Ek max s:t
s X r1 s X r 1

ur Yrk ur Yrj

X m

vi Xik j 1; . . . ; n

i1 X m i1

vi Xij  1;

ur ; v i  e ;

r 1; . . . ; s ; i 1; . . . ; m

where Xij and Yrj are the value of the ith input and the value of the rth output produced by the jth DMU, respectively. ur is the weight assigned to the rth output, vi is the weight assigned to the jth input; e is a small non-Archimedean number. The eciency score Ek should not be less than 1, and Ex 1 means that DMU k is ecient. With the same principle, the following two CCR models are employed to measure the eciencies of stage 1 and stage 2:

Figure 1.

Internet rm production process.

210

X. Cao and F. Yang X s m X E1 max w Z vi Xik p pk k s:t:

r1 q X p 1

2 j 1; . . . ; n;

wp Zpj

i 1 X m i 1

vi Xij  1;

wp ; vi  e; E2 k max s: t :
s X r 1 s X r 1

p 1; . . . ; q; i 1; . . . ; m X q
p 1

ur Yrk ur Yrj

wp Zpk j 1; . . . ; n;

X q
p 1

wp Zpj  1;

ur ; wp  e;

r 1; . . . ; s ; ; p 1; . . . ; q

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In order to attach the two sub-processes with the whole process, a model must represent the series relationship between the whole process and the two sub-processes (Kao and Hwang 2008). Suppose u r ; vi ; wp are the optimal weights of DMU k, we have Ek E1 k E2 k
s X r1 s X r1 s X r1

u r Yrk

X m

v i Xik  1; v i Xik  1;

w p Zpk u r Yrk

i1 X m i1

X q
p1

w p Zpk  1;

2 Obviously, Ek E1 k Ek Considering the series relationship of the two subprocesses, the method to calculate Ek is to include the ratio constraints of the two sub-processes into Equation (1) s X r 1

Ek max s:t:

ur Yrk

X m
i1

vi Xik j 1; . . . ; n j 1; . . . ; n j 1; . . . ; n

s X r1 q X p1 s X r1

ur Yrj

X m

vi Xij  1; vi Xij  1;

wp Zpj ur Yrj

i 1 X m i1

X q
p 1

wp Zpj  1;

ur ; w p ; v i  e ;

r 1; . . . ; s ; p 1; . . . ; q; i 1; . . . ; m

Equation (5) is a linear fractional programme. Using the CharnesCooper transformation, we obtain the following linear programme,

Enterprise Information Systems Ek max s:t:

s X r1 m X

211 6

ur Yrk vi Xik 1
m X

i1 s X r1 q X p 1 s X r1

ur Yri

vi Xij  0; vi Xij  0;

j 1; . . . ; n j 1; . . . ; n j 1; . . . ; n;

wp Zpj ur Yrj

i 1 m X i1

q X p 1

wp Zpj  0;

ur ; wp ; vi  e;

r 1; . . . ; s ; p 1 ; . . . ; q; i 1; . . . ; m

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After P the optimal weights are worked out, the eciencies areP obtained as Ps ur ; vi ; wp P Ps q s 1 2 Ek r1 ur Yrk ; Ek r1 wp Zpk = m v X and E u Y = i1 i ik r1 r rk k p1 wp Zpk : The optimal weights solved from Equation (6) may be multiple, and the 2 decomposition of Ek E1 k Ek would not be unique either. In the case that the decision maker is more concern about the eciency of stage 2, Kao and Hwang (2008) have formulated the following model to nd the set of weights which produces the largest E2 k while keeping the overall eciency score at Ek calculated from Equation (6). s X r 1 q X p 1 s X r1 s X r1 q X p 1 s X r1

E2 k max s:t:

ur Yrk wp Zpk 1 ur Yrk Ek ur Yrj

m X m X i1

vi Xik 0; j 1; . . . ; n j 1; . . . ; n j 1; . . . ; n

vi Xij  0; vi Xij  0;

wp Zpj ur Yrj

i1 m X i1

q X p1

wp Zpj  0;

ur ; wp ; vi  e;

r 1; . . . ; s ; p 1; . . . ; q; i 1; . . . ; m

1 2 After E2 k is obtained, the eciency of stage 1 is calculated as: Ek Ek =Ek . By considering the series relationship of sub-processes within an entire production process, the relational two-stage DEA can overcome the disadvantages of a traditional DEA model.

212 3.

X. Cao and F. Yang Results and managerial implications

In Section 2, we have introduced a relational two-stage DEA model. In this section, we employ Equations (6)(7) to analyse the performance of the 40 Internet companies which have been studied in Serrano-Cinca et al.s (2005) original work. In DEA analysis, DMUs must be homogeneous units. The 40 Internet companies can be classied into three types of e-business: e-tail, content/communities and search/ portals. These pure players operate all their activities on the Internet, while other rms are conducted only partially on the Internet. Table 1 shows the inputs, intermediate product, and output of the 40 Internet rms. This set of data is taken from Serrano-Cinca et al. (2005). The results of applying the relational two-stage DEA to the data of 40 Internet rms are presented. Table 2 shows that all of them perform ineciently in both stages, and none of them has a perfect overall eciency score, where the highest score is 0.1153 occurring at BOUT. The ve companies which perform eciently in marketability are: ASKJ, LFMN, ONHN, TVLY and UPRO. The only company which is ecient in protability is EGGS. In addition, the mean value of E1 k is much 1 2 higher than that of E2 , only four rms have a smaller E than E . This suggests that k k k the low overall eciency score is mainly caused by the ineciency occurring at stage 2, it is necessary for management to place more emphasis on the corporate protability. Using the traditional CCR model, Serrano-Cinca et al. (2005) have calculated the overall eciencies of the same 40 Internet companies. For comparison, the results are reported in the rightmost column of Table 2. Obviously, the eciency scores obtained by their approach are much larger than ours, giving by over-optimistic evaluation. There are 10 companies that perform eciently in the whole production process; however, in our relational two-stage DEA model, none performs eciently in both sub-processes. Of these 10 companies, ASKJ, LFMN, ONHN, TVLY, UPRO perform eciently only in the rst sub-process; none performs eciently in the second sub-process. Besides, BOUT, BUYX, MQST, SWBD, UBID perform eciently in neither sub-process. It is evident that our model is able to better evaluate Internet companies eciency, and can clearly identify the sub-process that causes ineciency. This result provides management with the direction of the productivity improvement for their rms. In order to accomplish this, the kind of competitive strategies that the Internet companies should adopt need to be addressed (Zhou et al 2008). Since each company has its own strengths and weaknesses in dierent subprocesses, based upon the categorisation proposed in the Boston Consulting Group Matrix, we employ the median method to classify companies into four quadrants: stars, cows, question marks and dogs (see Figure 2). Stars are those companies with both higher marketability and protability capabilities, which set a good example in the Internet industry. Unfortunately, none of the 40 Internet companies belongs to this category, suggesting that there is still much room for improvement. Question marks are the companies with high eciency in marketability only. There are 15 rms falling into this quadrant: ASKJ, BOUT, CNET, EBAY, GOTO, KOOP, LFMN, LOOK, MQST, ONHN, TGLO, SWBD, TVLY, UPRO and YHOO. They need to maintain their marketing advantage and devote greater eort to earning more revenues. In addition, cows are those rms with higher protability, but lower marketability. Since these six rms (AMZN, BNBN,

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Table 1. The 40 rms and their type of e-business, together with the values of inputs (X), intermediate product (Z) and output (Y) (from Serrano-Cinca et al. 2005). Sector Employees (X1) Expenses (X2) Assets (X3) Visitors (Z) Revenues (Y )

Ticker

Web

Enterprise Information Systems

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.

ADBL AHWYQ ALOY AMEN AMZN ASKJ BGST BNBN BOUT BUYX CDNW CNET EBAY EDGR EGGS FASH FATB GOTO HITS INSW IVIL KOOP LFMN LOOK MCNS MKTW MQST MTHR

http://www.audible.com http://www.audiohighway.com http://www.alloy.com http://www.crosswalk.com http://www.amazon.com http://www.ask.com http://www.bigstar.com http://www.barnesandnoble.com http://www.about.com http://www.buy.com http://www.cdnow.com http://www.cnet.com http://www.ebay.com http://www.edgaronline.com http://www.egghead.com http://www.fashionmall.com http://www.fatbrain.com http://www.goto.com http://www.musicmaker.com http://www.insweb.com http://www.ivillage.com http://www.drkoop.com http://www.lifeminders.com http://www.looksmart.com http://www.mediconsult.com http://www.marketwatch.com http://www.mapquest.com http://www.mothernature.com

e-tailer e-tailer e-tailer e-tailer e-tailer Search e-tailer e-tailer Search e-tailer e-tailer Content e-tailer Content e-tailer e-tailer e-tailer Search e-tailer e-tailer Content Content Content Search Content Content Content e-tailer

60 41 120 81 7,600 416 200 1,237 300 230 537 671 1,212 45 560 43 349 317 73 297 396 185 90 535 294 202 335 190

16,321 14,675 36,275 18,196 896,400 62,850 20,150 165,273 67,821 121,498 150,679 125,878 170,509 8,158 190,305 10,668 39,073 54,200 26,575 60,223 123,062 66,910 45,192 109,065 34,188 77,324 32,843 55,380

39,926 15,795 57,668 19,784 2,471,551 75,764 29,852 679,518 242,081 119,606 118,802 1,230,311 969,825 37,739 129,130 43,541 48,465 129,512 165,400 118,281 312,748 99,720 76,857 161,519 222,781 156,855 65,010 71,374

199 904 1,416 322 14,812 13,113 1,220 5,401 13,116 2,378 6,654 10,587 14,032 182 1,858 346 187 6,928 438 2,175 3,707 4,845 7,034 8,470 607 3,367 6,528 2,434

1,743 2,060 33,864 6,899 1,639,839 22,027 10,658 202,567 26,962 596,848 147,189 112,345 224,724 4,731 541,208 3,690 35,338 26,809 1,044 21,841 36,576 9,431 14,019 48,865 6,362 24,935 34,487 5,769 (continued)

213

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214

Table 1. (Continued). Sector Content Content Content Content Content e-tailer Content e-tailer e-tailer Content Content Search 635 101 453 52 220 1,172 253 84 281 157 277 1,992 115,154 51,375 83,908 14,990 62,464 230,098 43,530 44,563 45,827 46,773 88,216 440,647 Employees (X1) Expenses (X2) Assets (X3) 2,494,096 32,720 271,461 12,195 138,843 804,669 143,550 9,639 79,266 42,816 172,539 1,520,129 Visitors (Z) 2,174 7,755 5,572 2,577 5,564 4,223 962 3,479 2,749 8,821 4,256 39,569 Revenues (Y )

Ticker

Web

X. Cao and F. Yang

29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

NBCI ONHN SPLN SWBD TGLO TMCS TSCM TVLY UBID UPRO WOMN YHOO

http://www.nbci.com http://www.onhealth.com http://www.sportsline.com http://www.switchboard.com http://www.theglobe.com http://www.ticketmaster.com http://www.thestreet.com http://www.travelocity.com http://www.ubid.com http://www.uproar.com http://www.women.com http://www.yahoo.com

36,100 3,767 60,278 8,304 18,641 105,303 14,316 64,187 204,925 10,392 30,023 591,786

Enterprise Information Systems

Table 2. Company ADBL AHWYQ ALOY AMEN AMZN ASKJ BGST BNBN BOUT BUYX CDNW CNET EBAY EDGR EGGS FASH FATB GOTO HITS INSW IVIL KOOP LFMN LOOK MCNS MKTW MQST MTHR NBCI ONHN SPLN SWBD TGLO TMCS TSCM TVLY UBID UPRO WOMN YHOO Mean The eciency scores of the 40 Internet rms. Ek 0.0019 0.0028 0.0171 0.0067 0.0301 0.0058 0.0087 0.0202 0.0070 0.1153 0.0196 0.0000 0.0217 0.0099 0.0624 0.0062 0.0149 0.0083 0.0006 0.0063 0.0055 0.0028 0.0068 0.0078 0.0031 0.0065 0.0173 0.0019 0.0053 0.0017 0.0123 0.0109 0.0054 0.0079 0.0055 0.0633 0.0747 0.0040 0.0064 0.0236 0.0159 E k1 0.0640 0.3532 0.2083 0.0906 0.0792 1.0000 0.2902 0.1566 0.9910 0.1338 0.2576 0.4190 0.3944 0.1105 0.0624 0.1683 0.0229 0.6269 0.0948 0.1822 0.1626 0.4154 1.0000 0.3920 0.0851 0.2552 0.9527 0.2325 0.0935 1.0000 0.3301 0.9834 0.4698 0.0921 0.1085 1.0000 0.2917 1.0000 0.2631 0.4587 0.3823 Ek2 0.0301 0.0078 0.0821 0.0736 0.3801 0.0058 0.0300 0.1288 0.0071 0.8617 0.0759 0.0000 0.0550 0.0892 1.0000 0.0366 0.6488 0.0133 0.0062 0.0345 0.0339 0.0067 0.0068 0.0198 0.0360 0.0254 0.0181 0.0081 0.0570 0.0017 0.0371 0.0111 0.0115 0.0856 0.0511 0.0633 0.2559 0.0040 0.0242 0.0513 0.1094

215

Ek(CCR) 0.0790 0.3626 0.3591 0.1504 0.3920 1.0000 0.3551 0.3414 1.0000 1.0000 0.4300 0.5418 0.5789 0.1996 0.8057 0.2174 0.1866 0.6715 0.0971 0.2320 0.2052 0.4207 1.0000 0.4458 0.1063 0.2965 1.0000 0.2410 0.1397 1.0000 0.4293 1.0000 0.5007 0.1629 0.1560 1.0000 1.0000 1.0000 0.3069 0.6581 0.5017

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BUYX, EGGS, FATB, UBID) have more room to enhance in the stage of marketability, more emphasis should be placed on activities of marketing so as to attract more visitors. Finally, dogs are the rms that have poor performance in both marketability and protability. The remaining 19 companies belong to this category. Unless they synchronously improve their marketability and protability, their performance is unlikely to improve. In order to promote marketability, we suggest that Internet rms achieve accurate market positioning and step up publicity eorts to develop potential visitors. In addition, they could provide individual services to avoid direct

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X. Cao and F. Yang

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Figure 2.

Protability 6 marketability eciency matrix.

competition with other companies. To promote protability, Internet rms could adjust product and pricing strategy, using incentives such as free trial and electronic coupons to transform visitors into customers. Moreover, they should pay more attention on cost management and cut unnecessary expenses. 4. Conclusions and future research

The Internet is reshaping the business operation pattern with its unprecedented growth and application (Ng and Ip 2003, Li 2006, Xu 2007). The dot com rms are beneted hugely from the rise of Internet and ever increasing capital inows. However, relatively few studies have evaluated Internet companies in a multidimensional systems perspective (Xu 2000, Staley and Wareld 2007, Wareld 2007). Previous studies that apply DEA to measure the performance of Internet companies have obtained an integrated eciency score. The deciencies include: the eciency scores may inappropriately reect the entire performance of a system, and the studies can not detect which process causes the low eciency. Since the Internet companies have a two-stage production process: marketability and protability, the current study employs a relational two-stage DEA model to assess their eciencies. This study is the rst to use the two-stage DEA approach to analyse the eciency of Internet companies, opening a new avenue for dot com rms performance research. The results show that all of the 40 Internet companies have inecient overall scores, and none performs eciently in both stage 1 and stage 2. For the sub-process of marketability, ve rms have a perfect eciency score. For the sub-process of protability, there is only one rm performing eciently. By considering the series relationship of sub-processes, our approach is more reasonable in measuring the eciency and in identifying the inecient areas for improvement purpose. The 40 companies are categorised into four types, and relevant management proposals are put forward. However, much research eorts remain to be done in the future. The actual production systems of Internet rms are much more complex, since more variables and factors are involved. Web site design and other important variables (e.g. IT investment, page hits) are not considered in this study. What is more, only 40

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217

companies may lack representation. Therefore, in future performance evaluation of Internet companies, it is necessary to experiment with more sophisticated DEA models for a larger sample size while taking into account of more variables and factors. Acknowledgements
The authors are grateful to reviewers for their insightful comments and constructive suggestions that helped to improve the previous version of this paper signicantly. We also gratefully acknowledge the help from Douglas Vogel, Johanna Vogel, Xiaohu Fang and Jibao Gu. Special thanks go to Weilin Cao and Jianqin Lu.

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