Selecting internal and external supply chain functionality : The case of ERP systems versus electronic marketplaces

Purpose – Anecdotal evidence suggests that the use of the external supply chain (SC) functionality offered by business‐to‐business electronic marketplaces (EMPs) results in improved efficiencies and reduced costs in supply chains. Anecdotal evidence also suggests, however, that most of the benefits offered by EMPs could also be achieved by an increase in the firm's internal SC capabilities. The firm's decision is thus one of seeking SC efficiencies through internal capabilities (e.g. enterprise resource planning (ERP) systems), through participation in EMPs, or through a combination of both. Seeks to examine this issue. Design/methodology/approach – This paper conceptually examines the choice of using ERP systems versus EMPs within the context of value creation and competitiveness in an SC partnership. Then a dynamic, non‐linear model is proposed to support this decision. Findings – Three findings stand out. First, while small firms are often well served with just using EMPs, large firms are better off using a well‐balanced portfolio of internal and external capabilities along with their SC processes. Second, unless a sufficient level of internal information technology capabilities is present, firms with a large scope of stock‐keeping units will not be able to significantly improve their SC effectiveness by just using EMPs. Finally, the successful acquisition of SC capabilities depends on the level of uncertainty of the associated technology and market. Originality/value – This paper considers a range of organizational and environmental factors that impact the choice between EMPs and ERP systems that have not previously been considered. The findings have a major impact on the choice of internal versus external functionality to increase the firm's SC capabilities.