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Organisational transformation of securities brokerage firms

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  • 1. THE ORGANIZATIONAL TRANSFORMATION OF SECURITIES BROKERAGE FIRMS UNDER ELECTRONIC COMMERCE ENVIRONMENT MING-HSIEN YANG, JI-TSUNG BEN WU, SUNG-SHUN WENG, and MING-CHUNG CHEN Fu Jen Catholic University, Taipei 242, Taiwan ABSTRACT mation model composed of the environmental factors, strategies, and performances. We tested the possible relationships between Facing formidable pressure from on-line brokerage compe- the constructs in this model by analyzing the data collected fromtition, traditional brokerage firms were forced to transform to a questionnaire survey and validated the results using the casemaintain their competitive advantages in the securities market. study method.This study investigates the organizational transformation of se-curities brokerage firms under the EC environment in Taiwan. LITERATURE REVIEWThe findings are: 1. Technology strategy is the most importantstrategy for brokerage firms to implement online trading; 2. The The Environmental Factors For Brokerage Firmstransformation strategies among the brokerage firms that havedifferent environmental factors are significantly different; 3. The Cheng [2] suggested that the popularity of Internet applica-added value product and organizational change strategies have tions is the most important general environmental factor thatsignificant impacts on some perfonnance indices; 4.The length pushes brokerage firms to transform. The rapid developmentof the implementation time for online trading has a significant of Internet applications and the continuing growing populationimpact on the transformation perfonnance. Five cases were then of Internet users have made revolutionary impacts on businessstudied to understand the brokerage firms organizational behav- activities, bringing new opportunities for speeding up businessiors under the EC environment. The results also validated the re- operations [7,15]. According to industry statistics, the cost for alationship obtained from the statistical analysis. brokerage firm to offer online trading is only one fifth the cost of a Keywords: electronic commerce (EC), organizational trans- single brick and mortar branch [11]. Online trading can effective-formation, securities brokerage, online trading. ly save brokerage firms the increasing costs required by branch expansion in providing widely accessible services to customers INTRODUCTION in this fiercely competitive market [3]. However, there are some limitations for small companies in The securities brokerage industry in Taiwan is quite mature, adopting IT, such as the lack of resources, financial constraints,and the competition among the nearly two hundred brokerage lack of specialists, and high sensibility to outside pressures [23].firms is extremely fierce. It is thus very important for the firms Large companies possess more resources and adopt the new tech-to take the opportunity to transform themselves for sustainable nologies more aggressively. Besides, the leader of the organiza-competitive advantages under the EC environment. The or- tion plays a key role in the organizational transformation. Theganizational transformation, which is a huge change to a firm, environmental factors will affect the leaders recognition, andoccurs when there are bottlenecks in the firms operations that consequently influence the content and transformation processmust be reconsidered [13]. Securities brokerage firms must and determine the transformation performance [19]. The organi-transform their organizations to deal with the challenges from zation can coordinate its internal strengths and weaknesses withonline traders and build competitive advantages in the new EC the extemal opportunities and threats effectively; however, thisenvironment [12]. Brokerage must also consider the changes coordination depends on top managements values [8]. It is there-in environmental factors, from outside and inside the organi- fore argued that the support and participation of management iszation when designing their new business models. They must one of the major factors in brokerage firms offering online tradingadopt transformation strategies that better fit their corporate [2]. In addition, the organizational characteristics have significantcultures and lead to higher business performance. Our research impacts on the quality and effectiveness of the information systemquestions are: "what transformation strategies will lead securities planning process. The infonnation system planning method mustbrokerage firms to higher EC transformation perfonnance?" and match the organizational characteristics [18]. The product char-"what environmental factors will influence the securities broker- acteristics also affect organizational IT adoption. For example,age firms EC transformation strategies?" The answers to these information based products are sold easier on the Internet thantwo questions are crucial to successful security brokerage trans- physical products [16]. Moreover, most highly formalized organi-formation. zations will establish formal procedures for respective functional The purpose of this paper is to investigate these issues through activities, decisions, and control. These procedures are very use-an empirical study. We reviewed environmental factors that might ful in implementing organizational computerization projects. It isinfluence securities brokerage EC transformation, strategies that then argued that the degree of formalization of the organizationbrokerage firms can take, and the performance indices that may is highly correlated to the degree of IT usage in the organizationbe infiuenced by these strategies. We also proposed a transfor- [26]. Spring 2007 Journal of Computer Information Systems 111
  • 2. The Brokerage Firms Transformation METHODOLOGYStrategies and Performances Research Model And Hypotheses The match between information strategy and business strat-egy is helpful in achieving better business perfonnance [22]. Generally, an organization will design and select its opera-There are many strategies that companies can take for organiza- tional processes based on its present status and the organizationstional transformation. The transformation strategies for brokerage performances will be dependent on the selected processes. Thefirms can be summarized in six dimensions: added product val- so-called "present-process-performances" (3P) concept can beue, technology, organizational structure transformation, diversi- used to understand the organizations operations more clearly be-fication, management system change, and marketing [2,27]. cause it considers organizational operations in three stages andThe critical success factors of online stock trading include low is also an appropriate framework to analyze the organizationaltransaction fee, innovative marketing strategy, diversified prod- transformation. This study used the 3P framework to analyzeucts and services, stable trade system, complete database, high the transformation strategies that traditional securities brokeragequality research reports and investment suggestions [2]. Hence firms use under the EC environment. The present stage includesit is very important for the brokerage to adopt the strategy of the internal and external environmental factors that the brokerageadded product value. However, in order that the strategy of added firms need to take into consideration for their EC transformation.product value can be effectively implemented for online stock These environmental factors may affect the second stage, that is,trading, the technology plays an important role. Brokerage firms the EC transformation process which deals mainly with the strat-can use two technology strategies for online trading systems: egies that brokerage firms use to transform themselves to adaptone is to adopt the system provided by the integrated solution to the new competitive environment. The EC transformationfirms and the other is to develop the system in house. The for- strategies that brokerage firms may use are dependent upon themer is much preferred by brokerage firms in Taiwan because it environmental factors the firms face, and they may in tum affectcan reduce the implementation time and obtain up-to-date tech- the third stage, that is, the performance of the EC transformation.nologies [5]. In addition, the transformation implementation time will also Online trading removes the need for customers to interact with be included in our research model (Figure 1) as an interferencesalespeople and can reduce the number of employees in the sales variable because the EC transformation performance may bedepartment. Hence, the original organization structure must be dependent upon how long the transformation actions have beenadjusted. The brokerage firms organization structure transforma- implemented.tion is an important strategy to increase the firms competitive Based on the proposed model, the following three hypothesesadvantages [12]. In addition to this, online brokerage firms should will be tested in this study:also develop some strategies toward diversification. They couldcooperate with mobile communication firms to develop mobile HI: Brokerage firms with different environmental fac-securities services, or transform themselves into a networked tors may have different EC transformation strate-banking center and with the long term objective of becoming an gies.investment bank through strategic partnership, merger, or acqui-sition [27]. H2: Brokerage firms EC transformation strategies Change of management system is crucial for brokerage firms may aflect their transformation performances.to do online trading business. Online trading requires the sales-people to change their traditional roles. The salespeople must H3: Brokerage firms EC transformation implementa-improve their professional knowledge to promote themselves tion time may affect their transformation perfor-as investment consultants that can provide banking related in- mances.formation and services to their customers [3]. The reeducationand training of employees is very important to management sys- We selected the research variables in this study according totem change. It must be executed to meet both the corporate and the related literatures. The environmental factors included 27individual goals [4]. At last, a marketing strategy is critical to variables. There are two kinds of environmental factors neededthe success of the online trading business [10]. To effectively before a transformation proceeds: external environmental fac-compete with rivals, online brokerage firms need to design tors and internal environmental factors [6]. The external environ-marketing strategies for their customers based on the customers mental factors include general environmental factors (A1-A5),demands [2]. technological environmental factors (A6-A8), competitive envi- The securities brokerages business type is significantly cor- ronmental factors (A9-A11), and demand environmental factorsrelated to its business performance, as measured by five indices: (A12-A18) [6,9]. The internal environmental factors include theprofitability, liquidity, security, business efficiency, and growth organizational scale and structure (A19-A21), the value of top[14]. These perfonnance indices are good for financial perfor- management (A22-A24), and the corporate culture and charac-mances; however, they are not appropriate to measure EC bro- teristics (A25-A27) [6,17,23]. The transformation strategies con-kerage applications. Taiwan Stock Exchange Corp. (TSEC) pro- sist of 26 variables: added product value (B1-B5), the technologyvides several performance data items on online trading for every strategy (B6-B15), the strategy of organizational structure changebrokerage, including the monthly amount of new open accounts, (B16-B17), the diversification strategy (B18-B20), the strategycommissioned deals, commissioned dollars, concluded deals, of management system change (B21-B22), and the marketingconcluded dollars, average dollar amount per concluded deal, the stiategy (B23-B26) [2,27]. We used a five-point Likert scale toratio of concluded deals traded on line, the dollar ratio of conclud- measure all of the variables in this study.ed deals traded on line, and the monthly market share of online The transformation implementation time is a variable includ-trade concluded dollar amount [20]. ed in our model to determine the effect of the brokerage online 112 Journal of Computer Information Systems Spring 2007
  • 3. The environmental The transformation The transformation factors strategies performances The extemal • The strategy of added • The number of new open environmental factors value of product online accounts • General environmental factors • Technology strategy • The number of online 9 Technology environmental • The strategy of commissioned deals factors organizational structure • The amount of online • Competitive environmental change commissioned dollars factors • Diversification strategy • The ratio of online • Demand environmental factors • The strategy of concluded deals management system • The dollar ratio of online The intemal environmental change concluded deals factors • Marketing strategy • The online market share of • The organizational scale and concluded dollars structure • The value of top management • The corporate culture and characteristics / Figure 1: The research model. The implementation timetrading duration on the relationship between the strategy and per- strategy variables. The first factor analysis result produced sixformance. The implementation time was measured as the broker- factors whoseages online trading start to Oct. 2000. The transformation perfor- This study selected five largest brokerage firms in Taiwan formance has six variables, which are the performance indices listed further case study after the initial report based on the question-in Figure 1. These performance variables are denoted as Cl to C6. naire survey has been completed in the summer of 2003, SeniorEach performance variable is a monthly average value, which is managers taking charge of the firms EC transformation projectsthe quotient of the total monthly performance value counted until were interviewed. Though their titles differed from CIO to di-Oct. 2000 divided by the implementation time of transformation. rectors and vice president, all of them held the highest rankingHowever, the earliest beginning time of the implementation of positions in their firms. The in-depth interview was administeredtransformation in the study will be set as the July of 1997 when in a semi-structured way by asking the respondents three kindsthe performance data were initially reported by TSEC, of open questions: I, What were the major environmental factors that the firm considered when formulating its EC transformationData Collection strategy? 2, What kinds of transformation strategies contributed the most to the firms EC performance? 3, What were the main The study used a questionnaire survey to collect data to impacts of the firms EC transformation project on the organiza-validate the proposed EC transformation model using statistical tion? Each interview took about two hours and was conducted inanalysis. The survey targets are 81 traditional brokerage firms the respondents office.in Taiwan that offer online trades [20]. Among thesefirms, there was one virtual brokerage firm, severalfirms already merged, and four firms whose online Table 1: The profile ofthe respondent companiestrade performance data were not publicly reported. Weobtained 68 independent traditional brokerage firms Capital (Billion NTD) Below 2 2-4 Above 4with monthly online trade performance reports as the No (%) 17 (50%) 6 (17%) 11 (33%)research subjects. The questionnaires were mailed to Eaming per share (NTD) Below 0.3 0.3-0,6 Above 0.6the general managers of the online trade division ofthe firms. We received 36 returned questionnaires after No (%) 13(38%) 9 (26%) 12(36%)one month and 34 (50%) valid questionnaires can be Duration of online trade (year) Below 1 1-2 Above 2used for data analysis. Table 1 shows the profile of the No (%) 7 (20%) 17 (50%) 10(30%)respondent companies. Only thirty percent of the re-spondent brokerage firms offered online trading over Importance of online trade Low Middle Hightwo years, No (%) 8 (23%) 16 (47%) 10 (30%) A similar procedure was applied to conduct the P.S. One USD equals to 35 NTD approximately.factor analysis for the twenty-six transformation Spring 2007 Journal of Computer Information Systems 113
  • 4. Table 2 : The environmental factor variable factor analysis result Factor Variable Accumulated variance Eigenvalue a Transformation capability (TFl) A09-All,A22-27 23.19% 5.566 0.915 Infonnation technology (TF2) A01-A02,A06-A08 40.23% 4.089 0.918 Transaction demand (TF3) A12-A16 55.62% 3.694 0.945 Structure and scale (TF4) A19-A20 68.61% 3.118 0.865 Government regulations (TF5) A03-A05 78.57% 2.390 0.833 Table 3: The transformation strategy variable factor analysis result Factor Variable Accumulated variance Eigenvalue a Technology strategy (TSl) B08-B15 30.09% 7.522 0.972 Marketing strategy (TS2) B02, B21,B23-B26 45.84% 3.939 0.913 Added value of product (TS3) BOl, B03 58.67% 3.206 0.877 Organizational change (TS4) B16-B17 70.31% 2.911 0.889 Diversification strategy (TS5) B18-B19 80.03% 2.430 0.920 Expansion strategy (TS6) B20, B22 86.37% 1.584 0.702 DATA ANALYSIS AND DISCUSSION Table 5 shows the ANOVA results for the three brokerage group transformation strategies. HI is supported for the technol-Data Analysis ogy, marketing, added product value, and organizational change strategies. We used the Sheffe test for further group comparison We used factor analysis to reduce the amount of research vari- in these four significantly different transformation strategies. Theables for further analysis in our study. The principal components Sheffe test, also shown in Table 5, shows that the low awarenessanalysis method and the Varimax rotation method were applied to group had less aggressive technology and marketing transforma-conduct the factor analysis. Variables with factor loading values tion strategies than the other two groups. The median awarenesssmaller than 0.5 were deleted. Table 2 and Table 3 summarize group had less aggressive added product value and organizationalthe results. The environmental factors were reduced to five fac- change transformation strategies than the other two groups.tors (TF1-TF5) and the transformation strategies were reduced tosix (TS1-TS6). We then calculated the factor scores for TF1-TF5 Table 4: The environmental factor cluster analysis resultand TS 1-TS6. Each factor score Xi was then transformed into anew score Yi ranged from 0 to 100 by the Logistic transformation Group no Group name Observations Mean averageformula: Yi = 100 / [1 + EXP(-Xi)]. These new scores were usedfor testing the proposed hypotheses. Gl Low awareness 9 (27%) 3.436 To test HI, we grouped the firms by conducting cluster analy- G2 Median awareness 9 (27%) 3.998sis on the environmental factor score data and used ANOVA(analysis of variance) to check if the average scores of transfor- G3 High awareness 16 (46%) 4.291mation strategies of different brokerage groups were significantlydifferent. The brokerage firms were dividedinto three groups, as shown in Table 4, ac- Tahle 5: The ANOVA and Sheffe test resultscording to their environmental awareness Strategy F value p value HI Sheffe testscores for the factors that prompted themto initiate an online trading business. There Technology 4.636 0.017** Supported G2,G3>G1**were nine low awareness firms, nine medi- Marketing 3.435 0.045** Supported G2,G3>G1**an awareness firms, and sixteen high aware- Added value of product 6.502 0.004*** Supported G1,G3>G2**ness firms, respectively. The highest aware-ness group was at the stage where offering Organizational change 4.404 0.021** Supported G1,G3>G2**online trading was unavoidable to maintain Diversification 0.110 0.896 Unsupported —a competitive advantage in the brokerage Expansion 0.064 0.938 Unsupported —industry. The low awareness group was un-aware of the competitive situation. *:p<0.1,**:P<0.05, *** p<0.01. 114 Journal of Computer Information Systems Spring 2007
  • 5. Table 6: The summarized result of the multiple regression tests Dependent variable Independent variable Regression coefficient P value R2 (Adjusted R2) New open online accounts Implementation time (H3) 1,14x10^ 0,017** 0,265 (0,067) Online commissioned deals Added value of product (H2) 4,57x10^ 0,030** 0,456(0,310) Organizational change (H2) 4,81x10^ 0,034** Implementation time (H3) 1,97x10 0,002*** Online commissioned dollars Implementation time (H3) 5,74x10 0,005*** 0,348(0,172) Ratio of online concluded deals Organizational change (H2) 2,25x10 0,055* 0,252(0,051) Implementation time (H3) 5,11x10 0,092* Dollar ratio of online Organizational change (H2) 1,67x10 0,084* 0,208 (0,005) concluded deals Online market share Implementation time (H3) 2,73x10 0.003*** 0,383(0,217) of concluded dollars *: p<O,l, **: p<0,05, ***: p<0.01 We used multiple regression analysis to test H2 and H3, Table instance, a brokerage may require a longer time to communicate6 shows that H2 is supported for only three performance indices. with its employees about the transformation project if it has beenThe online commissioned deal performance may be affected by in a rather stable competitive environment in the past few years.the added product value and organizational change strategies. The The brokerage employees may not think that the transformation isratio of online concluded deals and dollar ratio of online con- necessary and may not easily accept a quick change. If the firmscluded deals were affected by the organizational change strategy, organizational IT capability is poor, most of its employees mightH3 was supported for five performance indices except the perfor- be afraid of the EC transformation due to the lack of requiredmance dollar ratio of online concluded deals. That is, the broker- expertise and experience. In such case a well-designed trainingage firms EC implementation time may affect the new open on- program may be needed for the organizational change strategy toline accounts, online commissioned deals, online commissioned help the transformation be successfully implemented.dollars, online concluded deals ratio, and online market conclud- Generally, it can be asserted that the organizational changeed dollar share performance. Because the EC implementation strategy is the most important strategy for the brokerage firmstime has a significant impact on performance, the transformation when implementing EC transformation. The regular operationsstrategy effect on the firms transformation performances is not of traditional brokerage firms depend heavily on human agents.very significant, possibly due to the implementation time: Table 1 However, when firms start to offer online trading, some of theseshows that seventy percent of the firms have offered online trad- agents will be replaced by computerized processes. The agentsing for less than two years. fear of being replaced or losing personal infiuence in the trading process might cause poor cooperation or even drastic resistanceDiscussion during the transformation. The firm can deal with this problem by using a proper organizational change strategy that is able to con- According to the statistical testing results, all respondent vince the agents that they will receive good care from the organi-brokerage firms exhibited no significant difference in adopting zation if they cooperate well with the transformation project. Thediversification and expansion strategies. However, the median significance of the EC transformation to the firm should be high-awareness firms with low corporate culture and characteristics lighted and clearly illustrated to the agents so they realize that theawareness had less aggressive strategies for added product value organizational transformation is necessary for the firm to sustainand organizational change. The brokerage firms with low aware- competitive advantage. This communication is very crucial to es-ness on general and technical environment had less aggressive tablishing intemal consensus regarding the huge engineering oftechnology and marketing strategies. The added product value transformation and should be executed extensively through for-and organizational change strategies were the only two among mal channels with the full support of top management.the six transformation strategies that had significant impact on EC The implementation time is a significant factor that affectstransformation performance. The median awareness firms might the brokerage EC transformation performance. Seventy percenthave disadvantages, worse than the lower awareness firms in EC of the respondent firms in the questionnaire survey offered on-transformation because they did not value these two strategies line trading for less than two years. This could be the reasonas much as the others. Why the median awareness firms did not why transformation strategies other than organizational changevalue the organizational change strategy can be attributed to their and added product value did not show a significant impact onlow awareness of the importance of corporate and characteristics, the transformation performance. To remove the possible interven-EC transformation is basically an organizational change process tion effect of a short implementation time, we conducted a case[25], A brokerages EC transformation project needs to consider study to further validate the transformation strategy impact on thethe firms corporate culture and characteristics and design appro- performance two and half years after the questionnaire survey.priate strategies for strong support from all employees and other We found that added product value and organizational changestakeholders so that the project can be smoothly executed. For were still the two most important transformation strategies that Spring 2007 Journal of Computer Information Systems 115
  • 6. influenced EC transformation performance. All five firms in the cant performance index differences among brokerage firms usingcase study had significant performance improvement after they different transformation strategies. Only two strategies, addedadopted these two strategies for one year. Technology, expansion, product value and organizational change showed significant im-and marketing strategies also showed impacts on performance. pacts on some performance indices. The reason that most of theAll firms experienced a significant performance improvement af- brokerage transformation strategies had no significant impact onter they adopted technology and expansion strategies within two performance is because seventy percent of the brokerage firmsto four years. However, the diversification strategys impact on have offered online trading for less than two years. We conductedthe transformation performance did not receive sufficient support a case study two and half years after the questionnaire survey andfrom the case study. Only one firm experienced significant perfor- the result allowed us to conclude that the brokerage firms ECmance improvement after adopting the diversification strategy for transformation strategies may affect their transformation perfor-about four years. The case study result confirms the intervention mances after a period of implementation time.effect of implementation time upon the transformation strategy The result from this study provides some managerial implica-impact on performance. This allows us to conclude that brokerage tions for brokerage firms implementing EC transformation. First,firms EC transformation strategies affect their performance after EC transformation is basically an organizational change process.a period of implementation time. Therefore a brokerage should consider the firms corporate cul- Two particular issues are noted from the case study. First, ture and characteristics and formulate appropriate strategies formost firms emphasized the importance of customer relationship stronger support from the related employees and other stakehold-management (CRM) systems in implementing EC transforma- ers. The significance of EC transformation to the firm needs to betion. Establishing a CRM system can effectively administer the clearly illustrated to the firms agents so that they realize that it is aenterprises relationship with customers so the enterprise can un- necessary action, making them willing participants. Second, goodderstand customer desires quickly and correctly [21,24,28], This cooperation between IS specialists and marketing professionals is especially important for brokerage firms because they usually on the EC transformation team is crucial to successful project have much more involved interactions with customers than other implementation, Confiicts could occur between the IS specialists firms. Brokerage firms will therefore consider using the CRM and marketing professionals during the transformation process. system as a key factor in EC transformation. Second, the domi- Effective conflict management mechanisms are needed to avoid nant managerial logic of the brokerage firm plays an interesting the disastrous consequences of drastic confiicts. Third, the domi- role in successful EC transformation. Depending on a firms strat- nant brokerage managerial logic used in running a successful tra- egies, systems, technology, organizational structure, culture, and ditional business could prevent managers from understanding the the success record, a dominant managerial logic emerges. This rationale behind the new technology and infiuence them to think is a common way of viewing how best to do business in the firm and act as if it were "business as usual". Avoiding the negative [1], Some brokerage firms have more dominant and pervasive impact of the dominant managerial logic on EC transformation is managerial logic because their management teams have been a very important issue in project implementation. This and other at the firms and in the industry longer. They usually have also related issues could be investigated in future research, run the traditional business more successfully. However, while implementing the EC transformation, two firms suffered because ACKNOWLEDGEMENT the dominant managerial logic prevented their managers from understanding the rationale behind the new EC technology and This research was supported by the National Science Founda- influenced their managers to think and act as if it were business as tion of Taiwan under grant no, NSC892416H030024SSS, usual. To avoid this dangerous consequence, in which the firms dominant managerial logic impedes the EC transformation, an- REFERENCES other firm appointed a very talented manager that had worked in the firm for only several months as the EC transformation team 1, Afuah, A, and Tucci, C, Internet Business Models and Strat- leader Although the firm still faced some difficulties, its EC egies: Text and Cases (2nd ed.). 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