Profiles of IT payoff success : an IT capabilities and business environments perspective

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Date

2006-05

Authors

Lee, Daniel Hae-dong, 1970-

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Abstract

Business value of information technology (IT) continues to be an enduring topic of importance to business leaders and academic scholars alike. Previous studies have shown that IT does make a positive contribution with regard to firm performance when IT investment is well-implemented and accompanied by complementary investments. In addition, several scholars have reported, albeit not directly and without much explanation, that business value gains differ rather significantly across industry boundaries and over different business environments. This paper, therefore, focuses on the question of “under what conditions do investments in IT generate above normal strategic gains or financial returns?” and examines the effects of business environmental factors on IT payoff. Grounded in resource-based view (RBV) and coalignment theory, three business environment characteristics--competitive pressure, environmental dynamism and IT intensity (i.e., $IT as a percent of total expenses)--are identified as potential moderating factors on the linkage between firm performance and different types of IT capabilities, namely, IT that automates, IT that informates and IT that transforms. I employ the case study method to conduct a preliminary investigation and develop testable hypotheses. With the IT announcement event study data from 1981- 1995 and business environments data from archival and secondary sources such as US Industrial Outlook and US Economic Census, I test proposed hypotheses using multivariate regression techniques. I find that environmental dynamism negatively moderates the linkage between IT capabilities and firm performance (i.e., cumulative abnormal return (CAR)), while competitive pressure and IT intensity positively moderate this linkage. In other words, when environmental dynamism is high, above normal financial returns associated with IT that transforms are shown to be dampened. For academic scholars, this study will enrich coalignment theory by specifically identifying optimal combinations of different types of IT and business environments. This study will help business managers and CIOs to make informed decisions regarding the right types of IT investments in a given business environment. The study concludes with discussions of its research contributions and implications of the study.

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