How IT wisdom affects firm performance: An empirical investigation of 15-year US panel data
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.
Section snippets
Definitions of capabilities
According to Collis [21], there are three categories of capabilities. The first category reflects a capability to perform the basic functional activities, such as distribution logistics and marketing campaigns, and is called static or zero-order capability. The second category is dynamic capability, namely the capability to learn, adapt, change and renew over time [65]. The third category is an extension of dynamic capability and called meta-capability, defined as the capability to develop
Operationalization of IT wisdom
In existing literature, there are three basic ways to operationalize IT capabilities. The first way is to use proxies, such as IT leaders, as indicators [8,18,52]. The major problem of this method is that IT leaders were selected subjectively, and the standards seemed to be decided casually by the editors of publications [18]. The second is to develop survey-based instruments [71]. This method is still at a stage of development and no validated survey items are emerged. The third is to use
Results
Table 2 illustrates the descriptive statistics and correlation matrix of variables. As expected, the five accounting-based indictors of firm performance (e.g., ROA, ROS, OI/A, OI/S, and OI/E) and Tobin's q were highly and significantly correlated. OEXP/S (representing operating expense to sales) was significantly but negatively correlated with the other six profitability indictors because it focuses on cost-reduction to improve firm performance.
Industry Type was significantly correlated with
Discussions
This study proposes and defines the concept of IT wisdom in an attempt to expand the IT business value research. We draw on this IT wisdom perspective and provide empirical evidence to confirm that there exist significantly positive and direct relationships between IT wisdom and seven major accounting-based and market-based measures of firm performance.
First, our findings suggest that companies pursuing IT wisdom tend to deliver stronger dynamic operations for better performance. This is
CRediT authorship contribution statement
Yucong Liu:Conceptualization, Methodology, Validation, Formal analysis, Writing - original draft, Writing - review & editing.Younghwa Lee:Conceptualization, Writing - original draft, Writing - review & editing.Andrew N.K. Chen:Conceptualization, Writing - original draft, Writing - review & editing.
Yucong Liu is an Associate Professor of Management Information Systems at the John L. Grove College of Business, Shippensburg University. He received his Bachelor of Engineering from Chongqing University at China, MBA from Pittsburg State University, and Ph.D. in Information Systems from University of Kansas. His current teaching and research interests include computer security, IT strategy, organizational network, and human-computer interaction. His research work appears in Decision Support
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Yucong Liu is an Associate Professor of Management Information Systems at the John L. Grove College of Business, Shippensburg University. He received his Bachelor of Engineering from Chongqing University at China, MBA from Pittsburg State University, and Ph.D. in Information Systems from University of Kansas. His current teaching and research interests include computer security, IT strategy, organizational network, and human-computer interaction. His research work appears in Decision Support Systems, Journal of Applied Business and Economics, and international conferences and workshops such as AMCIS, PACIS, and SIGIS.
Younghwa Lee is a C. Michael Armstrong Business Chair for The Armstrong Institute for Interactive Media Studies and the Farmer School of Business in the Department of Information Systems and Analytics at the Miami University. He received his B.A. and MBA from Korea University at South Korea, and Ph.D. in Information Systems from University of Colorado-Boulder. His teaching and research interests include website design, web usability, computer security and innovative technology acceptance. His work has appeared in premier journals in the information systems field including MIS Quarterly, Journal of Management Information Systems, Journal of the Association for Information Systems, Communications of the ACM, European Journal of Information Systems, Decision Support Systems, Information & Management and international conferences and workshops including ICIS, AMCIS, AOM, and SIGHCI.
Andrew N. K. Chen received his Bachelor of Business Administration in Accounting from Soochow University at Taiwan, M.S. in Accountancy from George Washington University, and Ph.D. in Operations and Information Management from University of Connecticut. His current teaching and research interests include knowledge management, IT business value, human computer interface design, database management, and business and Web programming applications. His research work appears in Decision Sciences, Decision Support Systems, European Journal of Operational Research, Information & Management, Journal of the Association for Information Systems, Journal of Management Information Systems, MIS Quarterly, and international conferences and workshops such as AMCIS, DSI, ICIS, PACIS, and WITS.