Information technology capability and its relation with business growth

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Information Technology Capability and Its Relation with

Business Growth

Mark Gerardus Berkhout University of Amsterdam BCs Economics and Business

10799788

Supervisor: Andreas Alexiou Data of submission: 13-7-2018

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Author M.G. Berhout Page 2 of 34

Table of Contents

Abstract ... 3

1. Introduction ... 3

2. Theoretical Framework ... 8

2.1. IT capability and the resource based view ... 8

2.2. IT capability and strategic fit ... 11

2.3. IT capability and business process agility ... 12

2.4. Contradicting study ... 14 3. Methods ... 16 4. Results ... 18 5. Discussion ... 20 5.1. Theoretical implications ... 20 5.2. Managerial implications ... 23

6. Limitations and Future Research ... 24

7. Conclusion ... 25

Bibliography ... 26

Appendices ... 30

Statement of Originality

This document is written by Student Mark Berkhout, who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

There exists conflicting literature, when it comes to the relationship between IT capability and firm performance. While several studies have found a positive relationship between the two (Bharadwaj, 2000; Stoel and Muhanna, 2009; Chen et al. 2014), the results of some more recent studies were unable to find such a relationship (Chae et al., 2014). This study attempted to further the understanding of the relationship, by examining an indicator of firm

performance that most previous studies had not included. Thus, the relationship between IT capability and organizational growth was empirically researched. This was done by

comparing companies with high IT capabilities, to companies with lower capabilities. This comparison was made over multiple years, namely 2013 until 2016. In the analysis, no support was found for the relationship. Thus, companies with high IT capability did not exhibit higher organizational growth than other companies. Several possible explanations for these results were discussed, including potential reasons for why they could be in conflict with previous studies.

1. Introduction

During the 21st century, the business environment has become increasingly altered by factors such as technological developments, high speed diffusion of new technologies, and the knowledge revolution (Ireland and Hitt, 1999). These circumstances signal the presence of numerous opportunities for growth. In order to exploit these opportunities, market leaders must continuously innovate, be aware of new products, and evaluate the possible new strategic opportunities that the firm encounters (Chakravarthy, 1997). Nonetheless, a long-running debate over whether these developments in information technology (IT) lead to higher productivity has been taking place in the literature (Dedrick et al., 2003). Over the last few decades, companies have increasingly began to see IT as a key to their success, as

evidenced by their spending. Whilst in the 1980s, only 15% of the capital expenditures of American companies went to IT, this number had already increased to 50% by the end of the 1990s (Carr, 2003). When studies started being conducted to investigate the relationship between IT and productivity in the 1980s, IT investments and firm productivity were found not to have an influence on eachother (Roach, 1987). IT investments consist of investments in not only computers, but also telecommunications and services, and the hardware and software that are related to these systems (Dedrick et al., 2003). In the literature, there was doubt about

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the effectiveness of IT, as during the period in which IT investments started to increase, a productivity slowdown was also taking place (Dedrick et al., 2003). This phenomena would be called the productivity paradox, and it instigated many researchers to study the

relationship. The examination of the relation between IT and organizational performance is called IT business value research (Chen et al., 2014). Organizational performance can include variables such as productivity, profit, costs, inventory, and competitive advantage (Hitt and Brynjolfsson, 1996). When the available data about the relationship started to increase due to the influx of new research, significant influences of IT investments on multiple performance indicators were found (Dedrick et al., 2003). The next question that was asked, was whether these IT developments would lead to temporary improvements, only concentrated in certain industries, or whether they would lead to long-term improvements of economic growth (Dedrick et al., 2003).

Another important aspect of IT that has been debated, is the required involvement of the chief executive officer (CEO) and the chief information officer (CIO). CEOs have considered IT to be a top strategic tool of a firm, but have stressed how it is not necessarily the technology itself, but the superior management processes and knowledge it provides that are valuable (Kearns and Lederer, 2003). For assessing the profitability of IT, alignment processes that support knowledge sharing are crucial (Tallon et al., 2000). Alignment refers to an organizational process that consists of systematic routines and procedures, and is different from an operational process (Kearns and Lederer, 2003). In this alignment process, managers engage in the exchange of knowledge (Kearns and Lederer, 2003). This can be necessary, as it can lead to a type of information that is rarely shared, namely personal knowledge, being made more available at the organizational level (Johannessen et al., 2001). Strategic IT alignment has also been identified as an indicator of the profitability of IT investments, and is a process that helps in collecting and consequently using information in a more effective and efficient manner (Henderson & Venkatraman, 1999). It achieves this by combining business and IT knowledge for the support of different business objectives (Reich & Benbasat, 1996). Success is then dependent on the continuous alignment of the IT strategy and the business strategy. This alignment is more easily achieved when the dialogue between IT managers and business managers is supported by the processes of strategy creation, and the strategies that follow from these processes clearly assign implementation responsibilities (Broadbent & Weill, 1993). To ensure that the business and IT strategies that result from the strategic alignment are implemented correctly, firms have to clearly communicate these strategies

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throughout the firm, as this will lead to better organizational understanding (Reich &

Benbasat, 2000). An essential aspect in IT alignment and the successful implementation of IT based strategies, is CEO participation in the IT planning process, as this can result in top managers becoming more supportive (Lederer & Mendelow, 1989). CEO participation also leads to the development of better managerial knowledge of IT assets and opportunities (Boynton et al., 1994).

The knowledge sharing that takes place with strategic IT alignment is affected by the information intensity that a firm is exposed to (Kearns and Lederer, 2003). Knowledge sharing takes place when either the CIO participates in business planning, or the CEO participates in IT planning. Participation in business planning occurs when the CIO is in frequent contact with the CEO and top managers, attends business planning meetings, and devises business goals (Sambamurthy & Zmud, 1999). Participation in the IT planning takes place when the CEO is in frequent contact with the CIO, is involved in IT planning, is knowledgeable about the firm’s IT opportunities, and is aware of the IT usage of the competition (Lederer & Mendelow, 1988). Information intensity influences knowledge sharing, and refers to how important it is for the different value chain activities of a firm to have access to information that is accurate, large in scope, and frequently updated (Teo & King, 1997). In firms with a high information intensity, the CEO tends to be more involved with the IT planning, and the CIO will often be more involved with the business planning (Kearns and Lederer, 2003). This is because in firms in which information is of high

importance, knowledge sharing can be used to raise the organizational knowledge and lead to the creation better performing IT strategies (Bharadwaj, 2000).. The increased involvement of the CEO and the CIO leads to improved alignment (Kearns and Lederer, 2003). This is because more CEO involvement in IT planning and more CIO involvement in business planning leads to the IT plan being more of a reflection of the business plan, and to the business plan being more of a reflection of the IT plan. The IT plan better reflecting the business plan occurs when the IT plan includes business plan goals and strategies, on top of including external environmental forces (Teo & King, 1997). The business plan being a better reflection of the IT plan occurs when it refers to the specific IT systems that the firm uses, and includes expectations about IT performance that are realistic (Lederer & Mendelow, 1989). When the CEO gets more involved, and has more contact with the CIO, the CIO gets a better understanding of the business environment, and thus becomes more proficient at creating IT strategies that reflect business strategies. Similarly, CEOs gain a better understanding of the

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IT environment, which leads to them being able to create business strategies that prominently include IT. Thus, the closer cooperation leads to both parties being able to influence the other in gaining a greater understanding of their respective fields. This leads to the conclusion that when operating in firms that are information intensive, it is important for CEOs and CIOs to try to establish a better strategic IT alignment and be more proactive, as this can help the firm in becoming more competitive in the business environment (Kearns and Lederer, 2003).

The increased knowledge sharing that IT can offer is not only be helpful when distributing knowledge within the firm, but can also be helpful when engaging with other firms. The functions that have been impacted the most by the rapid developments of IT, are supply chain management and logistics (Sanders and Premus, 2005). Supply chain

management has the goal of improving firm performance by collaborating with supply chain partners (Golicic et al., 2003). This collaboration can be reached by firms sharing information about the different processes in the supply chain, which effective and efficient IT can

facilitate in (Sanders and Premus, 2005). Due to the developments in IT, both the internal as the external information sharing of organizations has improved considerably. When supply chain management has been applied effectively, it is expected to lead to improved

organizational performance (Sanders and Premus, 2005).

The understanding of the broader impact of information technology (IT) is still a much studied issue for researchers, and much of the research indicates that superior IT capability can act as a source of significant competitive advantage (Chen et al., 2014). IT is not

considered a resource that can create business value on its own, but has to interact with other organizational resources in order to be able to influence performance (Wade and Hulland, 2004). Previous research has found a relation between IT capability and performance in the form of higher profits and lower costs (Bharadwaj, 2000). In the research of Bharadwaj (2000), companies with superior IT capability, which were found based on the Information Week rankings, were compared to a control group. The groups were compared to each other over the years of 1991 until 1994. The results indicated that the companies with superior IT performed better in a number of areas, namely: return on assets, return on sales, operating income to assets, operating income to sales, and operating expense to sales. In those areas, the superior IT companies performed significantly better in all of the four years. Operating

income to employees, cost of goods sold to sales, and selling and general administration expenses were also tested, but did not show significant results in any of the years. Despite these findings, conflicting studies have appeared, and some of the literature argues that the

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advantages of IT have become eroded in the current business environment (Chae et al., 2014). Chae et al. (2014) performed a replication study of the research of Bharadwaj (2000), also using the Information Week as their method to determine IT capability. This time, the comparisons made between the group with superior IT capability and the control group were performed over more recent years, namely 2001 until 2004. Unlike Bharadwaj’s study, in the results of Chae et al., no relationship was found between IT capability and return on assets, return on sales, operating income to assets, operating income to sales, and operating expense to sales. This was true for all of the examined years. The only significant result that was found, was for the cost of goods sold, which were lower for IT leaders in a single year. Chae et al. argue that this difference in results is due to the competitive advantage that superior IT previously offered no longer being present, as IT has become universalized and commoditized (Masli et al. 2011). A more elaborate reasoning for this will be offered later on in this paper. Interesting however, is that the reasoning seems to conflict with a paper that was published relatively recently. In the research of Chen et al. (2014), a different method for determining IT capability was used, and their results did indicate that a relationship between IT capability and firm performance is present. Despite this study examining the current business environment, a relationship was still found, which goes against the arguments made by Chae et al. The

explanation for this could be the different methods used by the studies. For determining IT capability, Chen et al. performed a field survey. The surveyees were senior IS executives and senior business executives. Both were provided with separate questionnaires, consisting of multi-item measures. The measurements of IT capability were based on the dimensions that were conceptualized in the paper of Bharadwaj. The executives then had to compare their companies to other companies in their industries based on these measurements. The

comparison was made by using a seven-point Likert scale. On this scale, a 1 indicated scoring worse than most other companies, and a 7 indicated scoring exceptionally well. It is possible that this studies methods deviating from the methods of Chae et al. could be the reason for the conflicting results. This deviation could also have been the result of Chen et al. including additional variables in their study, as they added business process agility as a mediator and environmental factors as a moderator. Perhaps when accounting for these variables, a relationship between IT capability and firm performance should still be found, even in the current environment.

Interesting to note, is that none of the previously mentioned papers included growth of sales as an indicator of firm performance. To the authors knowledge, the relationship between

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IT capability and firm growth in particular has not been extensively studied before, while it has the possibility to provide new insights. Studying the impact on growth (sales growth in the case of this paper) is of importance, because first of all, growth can lead to business owners obtaining financial gain due to higher firm performance and increased return on investment (Dobbs and Hamilton, 2007). Second, growth will lead to the increased likelihood of a firm surviving in the business environment (Davidsson and Delmar, 1997). It is

interesting to more closely study the relationship between firm growth and IT, as previous studies have indicated that IT capability might positively affect firm growth. For example, there have been studies that suggest that certain IT resources positively affect growth

performance measures (Chatfield and Bjorn-Andersen, 1997; Kmieciak et al., 2012; Barringer and Jones, 2004). Some studies have also found enterprise resource planning to be positively related to business growth (Shang and Seddon, 2002). Additionally, Chen et al. (2014) have found that superior IT capability can lead to improved business process agility, the latter of which has been found to be related to higher sales growth. It is for this reason that a study more directly aimed at understanding the relationship between the two variables has the opportunity to provide new and valuable insights, which is what this paper sets out to do.

The structure of the paper will now be discussed. After the introduction, the theoretical framework will follow, in which the relevant theories and knowledge already available in the literature will be discussed. After this, the methods employed to study the research question posed by this paper will be looked upon. Next, the results of the study will be presented. Then follows a discussion, in which the results are evaluated. The limitations of the research, and future research opportunities will also be presented. Finally, the paper is summarized in the conclusion.

2. Theoretical Framework

2.1. IT capability and the resource based view

In explaining the potential relationship between IT capability and organizational growth, the resource-based view is a framework that can be helpful. This framework sees the unique and firm-specific resources and capabilities as the fundamental drivers of performance (Barney, 1986). The effectiveness of the resources and capabilities is determined by the degree to which they are valuable, rare, inimitable and non-substitutable (Barney, 1991). Resources can be classified and divided into three categories: tangible, intangible and personnel-based.

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Tangible resources consist of all the firm’s physical assets and financial possessions, which would comprise the physical infrastructure for IT. Intangible resources are assets that are not physical in nature, and include intellectual property, patents, goodwill, and brand recognition. Intangible resources that are IT-based, are the knowledge and synergies that the IT supports. Personnel-based resources consist of the firm’s knowledge assets and technical proficiency. These would be the managerial and employee IT expertise. When a firm deploys and

integrates the resources that synergize with each other, organizational capabilities are created, and a competitive advantage can be reached. As a result, organizational capabilities are defined as a firm’s ability to effectively and efficiently utilize its resources (Amit and

Schoemaker, 1993). When referring to IT capability, this paper thus aims at the firm’s ability to deploy and integrate its IT resources with other capabilities and resources. More

specifically, this paper defines IT capability as the integrated bundles of resources related to IT, that allow firms to achieve desired results, through the coordination of processes and usage of IT assets (Chen et al., 2014). IT capability then consists of the IT infrastructure, the technical and managerial IT skills, the knowledge assets, the customer orientations and the synergies that can be supported by IT skills (Bharadwaj, 2000).

IT resources and capabilities can lead to improved organizational growth in several ways. In order to reach a competitive advantage, a firm’s tangible assets need to be able to out-perform the matching assets of its competitors (Barney, 1991). As stated before, the tangible IT assets consist of the IT infrastructure, composed of the computer and

communication technology, and the platforms and databases that are able to be shared throughout the firm (Ross et al., 1996). It could be argued that the effectiveness of this

resource is diminished, because it could be easily imitated by other firms that purchase similar systems. There are factors, however, that can lead to IT infrastructure acting as a source of competitive advantage. It is the synergies between the different components of the IT

infrastructure that allows for the removal of incompatible system barriers (Keen, 1991). When the infrastructure is not integrated, the resulting incompatibilities limit the business choices a firm is able to make. With the process of integration and its alignment with the firm’s strategy being complicated and insufficiently understood (Weill and Broadbent, 1998), it is expertise and time that lead to the successful implementation of an integrated infrastructure (Keen, 1991). As such, this tangible IT resource is considered a key source for long-term competitive advantage, through providing an avenue for continuous innovation and product improvements (Keen, 1991; Duncan, 1995).

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A firm’s personnel-based resources can also lead to the attainment of a competitive advantage. The aforementioned managerial and IT expertise can allow firms to be more effective in the integration of the IT and business planning processes, to more quickly develop applications to support business needs, to more efficiently communicate between business units, and to be more effective in the innovation of products and identifying future business needs (Bharadwaj, 2000). Effective competitive advantage and superior performance is then reached, because these personnel-based resources are often difficult to obtain and imitate, especially with regards to managerial IT expertise (Keen, 1993). Factors that contribute to this difficulty, are improvements of IT skills over time by accumulating experience, development of the interpersonal relationships supporting the IT skills, and the dependency of the

necessary skills on the type of organization and the location of the organization (Mata et al., 1995; Sambamurthy and Zmud, 1997). This learning curve having considerable time and effort costs for competitors to overcome, leads to IT resources providing sustainable benefits (Bhatt and Grover, 2005).

The final way in which a firm is able to generate competitive advantages with IT, is by utilizing it to leverage multiple different intangibles, examples of which are knowledge assets, customer orientation and synergy. With regards to knowledge assets, IT can be considered critical in attaining new tacit knowledge, speed up communication, quicker response times to environmental shifts, and catalogues and insights of histories (Dodgson, 1993; Sabherwal and King, 1991). Barriers for competitors to imitate this resource could be considered the the difficulty of putting in place similar structures that are effective, and sustaining ongoing support for the retention of knowledge bases (Bharadwaj, 2000). The next intangible,

customer orientation, has also been found to positively relate to firm performance (Narver and Slater, 1990). IT can be considered a valuable factor in supporting this orientation, when customer management systems are tightly integrated and coordinated with other units (Bharadwaj, 2000). It is this effective integration that could lead to a competitive advantage, as it can be argued that solely purchasing an IT system does not result in this desired

integration (Barney, 1991). Organizational synergies can be created or supported by IT, and help the firm in becoming more flexible, reaching faster response times in relation to the market, and acquire important resources such as patents (Brown and Duguid, 1998). Imitating these synergies can be difficult, due to the uniqueness of the circumstances (such as differing resources among firms), and the social contexts under which they are obtained (Bharadwaj et al. 1993).

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Thus, much of the literature suggests that by using and effectively combining tangible, intangible, and personnel based IT resources, firms are able to construct an overall IT

capability, which could act as a source of sustained competitive advantage. When using the resource based view as a framework, there exist two important variables that can act as moderators in the relationship between IT capability and firm performance. These are

strategic fit and business process agility. Both will be expanded on, starting with strategic fit. 2.2. IT capability and strategic fit

It is important to recognize that a firm’s competitive environment could influence the strength of the potential relationship between IT capability and firm growth. Before elaborating on this, the characteristics of IT capabilities have to be further expanded on. IT capabilities can be categorized as either internally or externally focused. The differentiation is based on the primary business process area that the capability supports (Stoel and Muhanna, 2009). Externally focused IT capabilities, are those IT resources that support the firm in faster response times to market shifts, like changing customer and supplier needs (Stoel and

Muhanna, 2009). Internally focused IT capabilities relate to the IT resources that increase the reliability and efficiency of the products and services a firm offers, in addition to the

resources that help in reducing the overhead costs (Stoel and Muhanna, 2009).

Firms can have discrepancies in the quality of their internally and their externally focused IT capabilities. These differences can be the result of strategies, acquisition decisions, stakeholder interests, and new technologies (Stoel and Muhanna, 2009). In order for either internal, or external focused IT capabilities to become a source of competitive advantage, they must outperform the equivalent capabilities of the competitors. This means continuous

improvement alone is not enough, but improvement rates that are faster than the competitors must be reached (Barney, 1991).

To see how these characteristics of IT capabilities relate to how the competitive environment can influence the relationship between IT capability and firm growth, one has to look at the strategic fit. Strategic fit is reached when there is a match between an

organization’s capabilities and the demands of the competitive environment in which it operates (Zajac et al., 2009). Strategic fits help organizations in succeeding in their goals and improving their survivability, whilst also positively affecting firm performance.

Because competitive environments can differ in their demand for the capabilities necessary for a strategic fit, the effectiveness of IT capability can differ depending on the

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industry. The three most important measurements of an environment are the dynamism, the munificence, and the complexity (Dess and Beard, 1984). Dynamism (or environmental turbulence) is related to the instability of the environment as a result of changes in

technology, customer needs, products and competition. Munificence is the rate of growth an environment is able to sustain. Mature and shrinking industries have high competition and low munificence, whilst industries with high munificence are still in a stage where the demand is growing and the competition is relatively lower in intensity. Complexity refers to the size of the product portfolio of the firm and the industry, the required knowledge of the products and customers before a firm can be competitive, and the degree to which other external actors are of importance for the success of the firm. Environments with higher

degrees of complexity have more information processing needs, and firms in this environment are often faced with more uncertainty (Dess and Beard, 1984). The main findings of the research by Stoel and Muhanna (2009) suggest that a fit between a firm’s IT capabilities and environmental needs have a positive effect on performance. More specifically, in

environments with high dynamism, high munificence, and high complexity, a firm’s investments in externally focused IT capabilities provide the highest returns. The superior performance in high dynamism environments, can be explained by the externally focused IT capabilities being able to quickly sense and respond to the threats and opportunities in this more turbulent climate. Similarly, by sensing the market in high munificence environments, firms can more quickly adapt their product offerings to customer demands and more

efficiently plan their inventories. Lastly, for firms in high complexity environments, where there is a need for high amounts of information in decision making, IT can increase the capacity of the information processing. Externally focused IT capabilities can also improve the information collection and processing activities, whilst providing more effective responses at a faster pace.

2.3. IT capability and business process agility

Another factor that can be important when describing the relationship between IT capability and firm growth, is business process agility. Business process agility is a firm’s ability to quickly and easily adjust the business processes and resources to the market environment (Tallon, 2008). In practice, business process agility is seen as an important factor in superior business performance. This is evidenced by a survey conducted by the Economist Intelligence Unit (Glenn, 2009), in which 88% of the executives participating regarded business process

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agility as a key factor in obtaining success on a global level. This is the result of business process agility providing more effective ways to manage market changes, both internally as externally, by adapting the business processes to these changes (Van Oosterhout et al, 2006).

Since these improved market reactions can lead to better performance and cost economies (Van Oosterhout et al, 2006), and business process agility is highly dependent on technology (Tallon, 2008), IT capability can serve as a leverage in this relationship. Examples of technologies that can improve the agility, are enterprise resource planning and customer relationship management. In the relation between IT capability and firm performance, business process agility acts as a mediator (Chen et al., 2014; Tallon, 2008).

There are three main ways through which IT capability can support business process agility in its objectives. These three ways are: facilitating rapid business process operations, facilitating flexible business processes, and facilitating business process innovation (Tallon, 2008). Rapid business process operations pertains to being able to make quick decisions, which IT enables by efficiently providing the relevant information necessary for solving a problem (Duncan, 1995). IT capability organizes and coordinates the different IT functions that provide data (such as delivery times and inventory). Additionally, communication with external parties is made more efficient.

Flexible business processes can be supported by IT capabilities in a number of ways. Firstly, it allows for the efficient and effective deployment of new systems, and complications with older systems are overcome more quickly and easily (Van Oosterhout et al., 2006). Secondly, market responsiveness is increased by improving the communication and information exchange, both within and outside the firm (Shang & Seddon, 2002). Lastly, through the use of IT business partnerships, IT business process integration, and business IT strategic thinking, coordination between the activities of a firm’s IT and business personnel can be achieved (Qu et al., 2010). Overall, these advantages achieved through leveraging IT capability allow for greater responsiveness and flexibility in a firm’s business processes.

Next, enabling business process innovation can be done through IT, by utilizing it to gain better insight in the different aspects of business processes, and using this insight to effectively separate, combine and integrate these aspects with each other, in order to create all new business processes (Sambamurthy et al., 2003). Additionally, business process

innovation is enabled by IT supporting organizational learning, and the adoption of the best practices (Tallon, 2008).

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When using IT to support business process agility in the aforementioned ways, the advantages of this agility become available. These advantages include faster response times to customer needs, improved flexibility, higher return on investment, increased revenues,

decreased costs, improved customer retention, improved market share growth, and, important in light of this research, increased sales growth (Chen et al., 2014; Tallon, 2008). There are, however, two environmental factors that can influence the positive relationship between IT capability and business process agility. The first factor is that of environmental hostility (Chen et al., 2014). This refers to the presence of disadvantageous external forces within the business environment of a firm (Zahra & Garvis, 2000). In such an environment, the

opportunities for continuous organizational and sales growth are reduced (Dess & Beard, 1984). The disadvantageous external forces can be economical, political and societal (Dess & Beard, 1984). As a result of these forces, a firm can be unable to improve its IT capability, due to access to the appropriate resources being restricted (McArthur & Nystrom, 1991). This reduces a firm’s flexibility, innovation, and return on investment in IT (Stoel & Muhanna, 2009). Process agility is further restricted by centralization, lack of communication, and over-formalization (Stoel & Muhanna, 2009). Thus, in this environment, a firm can be unable to make the best decisions, despite its IT capability. This leads to environmental hostility negatively moderating the relationship between IT capability and business process agility (Chen et al., 2014). The second factor that has an influence on this relationship is the earlier mentioned environmental complexity (Chen et al., 2014). Whilst without a strong IT

capability, firms in a complex environment are hesitant to make large changes, flexible IT infrastructure and skills can help in managing operations more effectively (Wade & Hulland (2004). Firms are then more willing to improve their business process agility, through using its IT capability to efficiently collect and analyze relevant information (Stoel & Muhanna, 2009). This leads to environmental complexity positively moderating the relationship between IT capability and business process agility (Chen et al., 2014).

2.4. Contradicting study

Despite the previously discussed research largely indicating that there is support for the relationship between IT capability and firm performance, a contradictory study questions whether this relationship still holds. Chae et al. (2014) argue that unlike in the 1990s, when Bharadwaj’s (2000) and much of the other research was conducted, matching or overcoming the IT capabilities of competing businesses has become considerably easier (Masli et al.,

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2011). Chae et al (2014) also argue that this can be largely explained by the rise in the usage of enterprise resource planning (ERP) and other standardized information systems, as opposed to the proprietary information systems that were used in the 1990s (Wang 2010). IT has become more affordable in both an economical and a technical sense, and is even considered by some to be a commodity (Chae et al., 2014). As IT capability has become more

homogenized and easier to obtain, it would thus no longer act as a source of sustained competitive advantage, by lowering the barriers to entry (Carr, 2003). In other words, companies can no longer differentiate themselves sufficiently in terms of IT resources, business process agility and strategic fit, which means IT is not effective for the pursuit of a sustained competitive advantage. Chae et al. (2014) conducted empirical research, more specifically a replication study of the research of Bharadwaj (2000), which confirmed their suspicion, due to it not having found a significant relationship between IT capability and firm performance. The firms with superior IT capability did not show higher profit ratios or lower cost ratios, and only a relationship between IT capability and lower cost-of-goods-sold was found.

Despite this contradictory study, this paper still expects to find a positive relationship between IT capability and growth. This is firstly due to the single contradictory study

performed by Chae et al. being outnumbered by the studies that find results in favor of the relationship. More interesting, is that the research by Chen at al. (2014) found support for the proposed relationship, despite the study being relatively recent. This goes against the

arguments made by Chae et al., which claim that in the current business environment, IT capability has lost its ability to serve as a source of competitive advantage. The second reason for still expecting a positive relationship to be present, is research specifically suggesting a positive relationship between growth performance measures and the three IT resources, namely tangible resources (Chatfield and Bjorn-Andersen, 1997), intangible resources (Kmieciak et al., 2012), and personnel-based resources (Barringer and Jones, 2004). Thirdly, a positive relationship between ERP systems and business growth was found, due to the flexibility of the system (Shang and Seddon, 2002). Lastly, the positive relationship between IT capability and business process agility that was discussed supports this expectation (Chen et al., 2014). This leads to the following hypothesis:

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3. Methods

This paper takes a similar approach to measuring an organization’s IT capabilities as much of the previous research. This entails using a quantitative data collection method. It employed a matched sample comparison group, which was also used by Bharadwaj (2000) and Chae et. al (2014). By employing this method, variables were compared between a treatment sample, in this study the companies with high IT capabilities, and a control sample. The control sample consists of companies that are matched to the high IT capability firms based on their size and industry type. Information about the leading firms in terms of IT capability was obtained as secondary data, namely the Information Week rankings. Information Week aims at yearly selecting the US companies that are at the forefront of technological innovation, on the basis of continuously improving criteria, and is widely regarded as a reliable benchmark (Chae et. al, 2014). The selection criteria for the best IT practices include IT strategies, IT budgets, business-technology infrastructure and technology deployment.

For the treatment sample, this study used the companies that appeared two or more times in the Information Week rankings of 2013 until 2016. Restricting the sample like this resulted in a sample of 93 firms with a more enduring IT capability. The sampled firms were matched to control firms. To obtain the control firms, another secondary database was used, namely Compustat. With Compustat, all firms were identified on the basis of a four digit SIC code. This code categorizes the firm into different industries. Next, each firm was compared to all the firms with an identical four digit SIC code on the basis of the prior five-year average sales. The firms with the closest average sales to the treatment firms were then chosen as control firms. A restriction was set that the control firm’s average sales had to be between 70% and 130% of the treatment sample’s average sales in the same timeframe, which follows the specification for defining industry comparison groups of Barber and Lyon (1996). None of the selected firms were ranked in the Information Week in any of the years. If none of the firms with the identical four digit SIC code met these requirements, firms with a

corresponding three or two digit SIC code were compared and selected with similar

restrictions. This leads to these firms being more different in terms of industry type, but grants a bigger sample. Taking these steps eventually resulted into a sample of 44 pairs, and thus 88 companies in total. For comparison, the sample of the study of Bharadwaj (2000) consisted of 56 pairs, and the sample of Chae et al. (2014) consisted of 296 pairs. Among the pairs of the sample of this research, the most frequently occurring industries were information technology,

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insurance, automotive and banking and financial services. Together, these industies accounted for over half of the sample.

Ideally, the treatment group and the control group are identical to each other in all areas except for IT capability. Despite this being unattainable, this paper attempted to at least have the pairs be similar in terms of industry and size. Having a control group with companies that have corresponding industries is important for this research, as growth rates could differ per industry and business environment (Stoel and Muhanna, 2009). A control group with roughly corresponding sales was used to ensure the comparison of firms of similar sizes and mostly similar IT budgets. Additionally, firms similar in size and industry are more likely to utilize the same accounting methods and procedures (Holthausen and Leftwich, 1983). This leads to better comparability between the firms.

For the measurement of the dependent variable, which is organizational growth, this paper used the most common means of operationalizing this variable. This method is considered uncontroversial, and uses the growth of sales as the indicator of organizational growth (Robson and Bennett, 2000). This data was also be obtained by consulting the Compustat databases. The sales data for all 88 companies were collected, and based on this data the growth rates were calculated for each year, by subtracting the sales of the previous year and dividing this by the sales of the previous year. The growth rates were then compared between the treatment sample and the control sample for all four years.

To see which statistical test would be most suited to test the hypothesis of superior IT capability leading to higher growth rates, it was first examined if the firms were normally distributed by using the Kolmogorov-Smirnov test. The Kolmogorov-Smirnov test rejected the hypothesis that the growth rates were normally distributed. As a result of this, a more reliable test without assumed normality was used, namely the Wilcoxon Signed Rank test. This test was similarly used by both Bharadwaj (2000) and Chae et al. (2014). This test was also used because the firms were conditionally matched, which means they were not

independent of each other. When using the Wilcoxon Signed Rank test, a normal distribution can be assumed when the sample size is larger than 14. This condition is met in this study, as the sample size is equal to 44. Important to note is that this test is used to measure correlation, not causation. This means that even if a correlation should be found between the variables, this does not necessarily mean that the independent variable is the cause of the changes in the dependent variable.

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4. Results

In Table 1, the results for the different years are presented. Due to the growth rates not being normally distributed, the median is a better indicator than the mean. The results show that the hypothesis was not supported. The growth rates in 2013 were not significantly higher between the treatment group (Mdn = 0.0331) and the control group (Mdn = 0.0185), T = 344, p = .078, r = -.19.

In 2014, the growth rates also did not show a significant difference between the treatment group (Mdn = 0.0462) and the control group (Mdn = 0.0212), T = 397, p = .253, r = -.12. Again, in 2015, no significant difference was found between the growth rates of the treatment group (Mdn = 0.0285) and the control group (Mdn = -0.0069) either, T = 376, p = .165, r = -.15.

Lastly, in accordance with the results of the other years, 2016 showed no significant discrepancy between the growth rates of the treatment group (Mdn = 0.0482) and the control group (Mdn = 0.0196), T = 465, p = .726, r = -.04. Thus, no significant support for the hypothesis was found in the results of any of the examined years.

This means that, contrary to the expectations of this paper, the results suggest that there is no relationship between superior IT capability and organizational growth. The results are further illustrated in figure 1. Interesting to note, is that the results did show that firms with superior IT consistently had higher medians than the other firms., namely in all of the years. In fact, in all of the years except for 2013, the medians of the treatment group were more than twice as high than the control group. Even in 2013 the median was almost twice as high. These results could indicate that a significant relationship might have been found if the sample size of the study was larger. A sample size of 44 might have been insufficient in performing this research, as even Bharadwaj (2000), with a sample size of 56, did not consistently find significant results with differences this large. However, for return on assets and the return on sales, the significant results that Bharadwaj found showed that the medians of the treatment group were similarly different, with them being around twice the size of the medians of the control group.

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Author M.G. Berhout Page 19 of 34 Table 1. Results 2013 2014 2015 2016 Mean Median Z Value P Value Mean Median Z Value P Value Mean Median Z Value P Value Mean Median Z Value P Value Growth Treatment 0.0370 0.0331 -1.762 0.078* 0.0434 0.0462 -1.144 0.253 0.0356 0.0285 -1.389 0.165 0.0370 0.0482 -0.350 0.726 Growth Control 0.0702 0.0185 0.0282 0.0212 0.0161 -0.0069 0.0271 0.0196 * p < 0.10

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Figure 1. Median growth by year

5. Discussion

5.1. Theoretical implications

This study contributed to the business IT value literature, by first identifying a gap in this literature. Studies have been conducted that explore the relationship between IT capability and several indicators of firm performance, such as return on assets, return on sales, operating income to assets, cost of goods sold to sales, operating expense to sales and selling and general administration expense. However, an indicator of firm performance for which empirical evidence for its role was scarce, was firm growth. This study attempted to adress this gap, by exploring the relationship between IT capability and firm growth. This

contributed to the understanding of when the presence of superior IT capability can, and cannot lead to improved outcomes. Additionally, this study contributed to the ongoing debate about the business value of IT. It suggests that the different aspects of a firm’s IT resources and capabilities are still imperfectly understood, as conflicting and inconsistent empirical findings still appear in the literature. An example of this, is the contradictions that were found between the results of the studies of Bharadwaj (2000) and Chae et al. (2014). These studies

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explored the relationship between IT capability and firm performance, but neither included business growth as an indicator of firm performance. Whilst Bharadwaj found a significant positive relationship between IT capability and firm performance, the study of Chae et al. (2014) did not support this finding. Chae et al. (2014) argue that this changing relationship can be a result of new developments in the time period between the conducting of the two studies. They propose that IT capability is no longer a strong predictor of firm performance in the current business environment. This research therefore tried to examine if similar results are found in the current business environment, when studying this other variable of firm performance, namely business growth. This study used a similar method to answering the research question as the two previous studies, but employed more recent data, next to using business growth as an independent variable.

The method involved comparing the sales growth between companies with high IT capability and control firms. The companies were compared over multiple years, namely from 2013 until 2016. This study expected firms with high IT capability to have superior sales growth. This expectation was, firstly, a result of literature supporting the relationship outnumbering the literature not supporting the relationship. The supporting literature also included a recent study, which seemed to go against the arguments made by Chae et al (2014). Secondly, the expectation was created by literature suggesting a relationship between

enterprise resource planning systems and business growth (Shang and Seddon, 2002). Thirdly, a relationship was found between IT capability and business process agility, with the latter being positively related to sales growth (Chen et al., 2014).

Contrary to the expectations, the results did not support a relationship between high IT capability and business growth. Although the firms with high IT capability showed higher medians in all of the years that were examined, none of these differences were statistically significant. This could mean that the assumptions made by Chae et al. (2014) were correct. Based on the assumptions, it would follow that the IT capability of the companies chosen by the Information Week differed little from that of the control companies, due to the

homogeneity of IT capability in the current business environment. Another possibility is that the method used to conduct the research is flawed, mainly the process of selecting the sample of firms with high IT capability.

First, the possibility of IT capability losing its predictive power over business growth due to changes in the business environment, will be examined. The value of IT has changed drastically over the past two decades, due to constant innovations and developments. IT has

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become more easily available, in addition to becoming more homogeneous. This has mainly been the result of decreased costs, increased adoption of enterprise resource planning systems, and the widespread adoption of the internet (Chae et al., 2014). IT capability could, in that sense, be considered commoditized. It then no longer serves as a source of sustained competitive advantage, as the barriers to entry that were once high, have decreased (Carr, 2003). The relationship between enterprise resource planning systems and business growth, that was found by Shang and Seddon in 2002, could potentially no longer be present because of this. Enterprise resource planning systems have become standardized, and no longer require the high investments of the past. They are adopted to follow the best industry

practices. However, when the majority of firms follows these practices, it can no longer serve as a competitive advantage (Wang 2010). This could be argued to be the case in the current environment, since adopting these IT practices has become a competitive necessity, without which a firm’s survival is uncertain (Chae et al., 2014). This homogeneity would also mean that the effects of IT capability on business process agility are very similar between firms. This results in the relationship between business process agility and sales growth not leading to significant growth differences between firms.

The second possibility for the results of this study conflicting with other studies, is selecting high IT capability firms based on the Information Week. This has firstly lead to this study having a relatively small sample size, as Information Week has switched to ranking the top 100 companies based on IT capability, instead of the top 500 that was used for many studies in the past. This small sample size could have had a negative effect on the reliability of this study. Secondly, using the Information Week to determine high IT capability could be unreliable, as the criteria used for the rankings are subject to constant changes. While, for instance, in the beginning of the 1990s the rankings were made based on the IT department sizes alone, this changed in the 2000s. In the 2000s, the companies had to provide Information Week with an essay about the innovative ways in which their IT was used, on top of

providing additional quantitative data. This means that the companies that Bharadwaj (2000) studied, were selected on variables that drastically differ from the variables used to form the more recent rankings. This could explain the conflicting studies, and using more stable methods of determining IT capability could have lead to more consistent results. The flaws in using the Information Week to determine IT capability could also explain the conflicting results of the study of Chae et al. (2014) and Chen et al. (2014), despite both studies being more recent. Chen et al. used a different method to determine a firm’s IT capability. For the

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gathering of their data, they performed a survey. They provided questionnaires to both senior IS executives and senior business executives. The questionnaires were different between the two groups, and consisted of multi-item measures. IT capability consisted of the earlier conceptualized dimensions: IT infrastructure, IT managerial skills, IT business partnerships, IT business process integration, business IT strategic thinking, and external IT linkage. The surveyees were then asked to compare their company to other companies in their industry based on the items. This was done using a seven-point Likert scale, where a 1 indicates the company scores worse than most others, and a 7 indicates scoring exceptionally well. It is possible that using this method could more reliably identify firms with different IT capability levels, and would not have lead to conflicting results. Also important to note is that Chen et al. included additional variables to help explain the relationship between IT capability and firm performance. They included business process agility as a mediator and environmental factors as a moderator. Including these variables results in their study being more

comprehensive, which could also explain the difference between their results and the results of Chae et al.

5.2. Managerial implications

The results of this study have several implications for the management of a firm. They indicate that investment aimed at improving IT capability do not necessarily lead to overall improved performance of the firm. When pursuing a growth strategy, it could be more effective to utilize the firm’s resources differently. It can in some cases be more effective to cut costs by delaying investments in IT, as well as aiming at more strictly managing of the costs and risks overall, instead of being completely focused on gaining the advantage (Carr, 2003). It then becomes important to make a distinction between essential investments and investments that or unnecessary or counterproductive.

This paper also argued that the lack of a relationship between IT capability and firm growth could be the result of IT capability no longer acting as a source of sustained

competitive advantage in the current business environment. IT capability has become more homogenized, and it could therefore be interesting for managers to hire high-skilled IT personnel to become more innovative with their usage of IT in the firm, for instance by exploiting more opportunities that arise as a result of new products and services. It could then be possible to regain the ability to create a competitive advantage with the leveraging of IT, by creating resources that are valuable, rare, inimitable, non-substitutable and exploitable.

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Achieving this would require a firm to be able to accurately assess its strengths and

weaknesses. An important part of this process is for managers to compare themselves to their competitors, especially those with high IT capabilities. These comparisons can be made most effectively when using quantitative measurements of performance.

6. Limitations and Future Research

Although this study was performed with similar methods as much of the previous research in this area, these methods are subject to limitations. A first limitation is the usage of the

Information Week in the selection of firms with superior IT capability. The relatively small sample size it provided and its unstable nature were already briefly touched upon, but its validity is also a factor that should be more thoroughly examined. The methods for the selection of the companies could currently not be scientific enough, as its based on experts’ opinions. Another complication, is the fact that the IT capability of companies that did not appear in the Information Week was considered to be inferior. This could not be the case, due to response bias omitting some firms from the rankings, despite them possessing high IT capability. Additionally, the Information Week rankings only consisting of firms from the United States has a negative impact on the generalizability of the research. Preferably, alternative ways of measuring IT capability that are more valid and reliable, should be investigated.

Another limitation of the research is the lack of additional variables that can influence the relationship between IT capability and business growth. Initially, this research also planned on investigating the effects of industry types on the relationship. Unfortunately, the sample could not provide enough data for it to lead to meaningful analyses. Future research should aim at taking other variables into account. Examples of variables that could influence the relationship, are business process agility and environmental dynamism, munificence, and complexity. Adding such variables could add to the understanding of the situations in which IT capability is most effective. Additionally, it can be interesting to aim research efforts at other potential variables that are related to IT capability. For instance, the effects of IT capability on business culture, staff and the amount of patent applications could provide valuable knowledge for both academics and practitioners.

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7. Conclusion

This study attempted to answer the following question: Is there a relationship between IT capability and business growth? This research was conducted to add to the body of literature that aims at expanding the knowledge of IT capability. The research method used, followed a similar approach to previous research, to allow for better comparability of the results, and for conflicting results to be more noticable. Treatment groups of firms with superior IT capability were compared to control groups of firms with inferior IT capability. The comparison was made over multiple years, namely from 2013 until 2016. The results of the research suggest that there is no relationship between IT capability and business growth. This paper then attempted to provide explanations for this outcome, and why it could be conflicting with some of the previous research. Lastly, this paper provided some suggestions and direction for future research opportunities.

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Appendices

Kolmogorov-Smirnova Shapiro-Wilk

Statistic df Sig. Statistic df Sig. Growth 2013 ,338 88 ,000 ,316 88 ,000

Growth 2014 ,133 88 ,001 ,788 88 ,000

Growth 2015 ,093 88 ,056 ,943 88 ,001

Growth 2016 ,177 88 ,000 ,756 88 ,000 a. Lilliefors Significance Correction

Table 2. Tests of Normality

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Table 4. Hypothesis Test Summary (2013)

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