How IT wisdom affects firm performance: An empirical investigation of 15-year US panel data

Highlights

• We introduces the concept of IT wisdom and establishes the relationship between IT wisdom and firm performance.

• IT wisdom as a holistic meta-IT capability can strategically enable and exercise suitable IT and organizational capabilities.

• We test our hypotheses with panel data collected from 26 US companies over 15 years.

• IT wisdom is significantly related to firm performance indicated by both accounting- and market-based measures.

Abstract

This paper introduces the concept of IT wisdom from a perspective of meta-capability and establishes the relationship between IT wisdom and firm performance. We propose that IT wisdom as a holistic meta-IT capability of a firm can strategically enable and exercise suitable IT capabilities and organizational capabilities to adapt to changing environments for improving firm performance. We test our hypotheses with panel data collected from 26 US companies over 15 years. The results of data analysis show that IT wisdom is significantly related to firm performance indicated by both accounting-based measures and market-based measures. Theoretical and practical implications of the findings are presented.

Introduction

Information technology (IT) business value research is considered fundamental to the contribution of the information systems (IS) discipline [14,44,45,70]. Many theoretical perspectives have been proposed to reveal how “IT” can contribute to firm performance, including “IT capabilities” [8], “digital option” [51], “resource complementarity” [46,69], “IT-business alignment” [61,67], and “competitive intelligence” [72]. Despite these efforts, IS scholars still often confront with the same question – “can IT contribute to firm performance?” – which, to our knowledge, does not reach a conclusive answer.

Once encouraging efforts by Bharadwaj [8] and Santhanam et al. [52] provided empirical evidence that IT can be directly related to firm performance. However, their findings were recently challenged by Chae et al. [14] who followed these two studies using more recently collected data but found no direct connection between IT and firm performance. One school of thoughts for explaining these inconsistent findings argues on the challenge of conceptualization and operationalization of “IT” (e.g., [14]). Some IS scholars thus have turned to different perspectives and proposed the concept of dynamic IT capability based on the dynamic capability theory [23,65] which encompasses the ability of a firm to renew its IT resources as IT capability [34,71]. Their definitions of dynamic IT capability, while understandable and alleviating the limitation of IT capability based on the Resource Based View [3], still simply equate IT resources to other resources, and thus make dynamic IT capability as merely a subcategory of dynamic capabilities.

Meanwhile, there has been a notable vigorous effort of IS scholars who describe the IT-enabled capabilities perspective where IT can develop and enable organizational capabilities leading to superior firm performance [7]. They argue that this IT-enabled capabilities perspective is related to a hierarchy of capabilities [26,48]. Along this perspective, Collis [21] suggests that there are three categories of capabilities, namely basic capabilities, dynamic capabilities, and meta-capabilities. Holland [33] refers meta-capability as the capability that enables and exercises other capabilities. In the IT capability realm, we conjecture that firms can possess and should pursue a higher order IT capability itself. That is, a meta-IT capability can develop and integrate various levels of IT capabilities when needed and in turn generate and enable appropriate various orders of organizational capabilities to improve firm performance.

As a continual effort to investigate the effect of IT on firm performance, this study proposes a perspective of IT wisdom (ITW) as a holistic meta-IT capability of a firm which can strategically enable and exercise any suitable IT capabilities and organizational capabilities for improving firm performance. We use longitudinal empirical data to demonstrate that, in a changing networked business environment, IT wisdom can be a representative measure of IT which can confirm its relationship with firm performance. Purposely, we respond to the calls from existing studies on (1) “explaining the relationship between IT capability and firm performance ([14], p. 324),” as well as on (2) “examining the interplay between IT-enabled capability and networks ([20], p. 563).”

Our key central thesis is to propose the IT wisdom concept from the perspectives of meta-capability and IT-enabled capabilities as well as demonstrate the positive and direct link from IT wisdom to firm performance with a 15-year panel data. The major contribution of this paper is twofold. First, we adopt a meta-capability perspective of IT on business value. With this, we disentangle the theoretical classification and conceptualization of “IT” and propose an IT wisdom concept to further expand and clarify our understanding of IT business value. Second, as the first and exploratory attempt, we operationalize IT wisdom and collect empirical data to show evidence of the impact of IT wisdom on both accounting-based and market-based performance of a firm.

The paper is organized as follows. We first provide clarification of differences between IT resource, IT capability, IT-enabled capability, dynamic capability, dynamic IT capability, and our proposed IT wisdom (from a perspective of meta-capability) as an expansion and improvement from existing literature. We hypothesize the relationships between IT wisdom and both accounting-based and market-based measures of firm performance. We then depict a pertinent operationalization of IT wisdom and longitudinal data collection to test our hypotheses. Finally, we present our findings and discuss implications as well as future research directions.