The effect of digitalization on IT capabilities & the competitive capabilities offered within firms

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The effect of digitalization on IT capabilities & the competitive

capabilities offered within firms.

K e v i n O v e r t o o m 1 0 9 8 9 9 7 8 M S c T h e s i s S u b m i s s i o n d a t e : 3 0 - 0 6 - 2 0 1 7 - V 1 . 0 F i n a l E x e c u t i v e P r o g r a m m e i n B u s i n e s s S t u d i e s S t r a t e g y t r a c k S u p e r v i s o r : D r . D i p l . - W i r t . - I n g . S . K o r t m a n n

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University of Amsterdam, Amsterdam Business School.

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Statement of Originality

This document is written by Student Kevin Overtoom who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is 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.

Signature ___________________________________________

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University of Amsterdam, Amsterdam Business School. 3

Table of content

Abstract 4 Introduction 5 1 Literature review 8 1.1 RBV and Capabilities 8 1.1.1 Zero and First Order: Operational Capabilities 9 1.1.2 Second Order: Core Capabilities 9 1.1.3 Third Order: Dynamic Capabilities 10 1.2 Technological uncertainty 10 1.3 Innovativeness orientation 12 1.4 Ambidexterity & Digital Explorative strategies 13 1.5 IT Capabilities 16 1.6 Competitive capabilities 21 2 Proposed theoretical model 23 2.1 The variables & hypothesis 23 2.1.1 Technological Uncertainty 23 2.1.2 Innovativeness Orientation 24 2.1.3 Digital Explorative Strategy 25 2.1.4 IT Capabilities 26 2.1.5 Competitive capabilities 27 2.1.6 Control variables 28 2.2 Propesed theoretical model 29 3 Research Methodology 30 3.1 Research method 30 3.2 Survey based research & sample 30 3.3 Pilot survey 31 3.4 measures 32 3.5 Data analysis strategy 33 3.5.1 Dataset preparation 34 3.5.2 Assessment of the measurement model 35 3.5.3 Assessment of the structural model 39 4 Results 41 4.1 Hypothesis testing 41 5 Discussion 43 5.1.1 Theoretical Implications 46 5.1.2 Managerial Implications 47 5.1.3 Limitation and Further Research 48 6 Conclusions 50 References 51 Appendix A: Survey questions 56 Appendix B: Survey respondends 58 Appendix C: Contructs with item loading 59 Appendix D: Descriptives 61

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ABSTRACT

Digitalization, the use of technology to improve or shape new process & business models, is a hot topic for organizations around the world. The central research question on this topic revolves around the technological uncertainty which has arisen as a result of digitalization how this uncertainty relates to competitive capabilities prices and how this relation is influenced by innovativeness orientation, digital explorative strategies and IT capabilities.

The empirical evidence is provided through data collected from an online survey under employees who are involved with digital transformation within their company. The dataset consists of 98 completed responses from unique companies. The hypothesized relations between technological uncertainty, innovativeness orientation, digital explorative strategies, IT capabilities and competitive capabilities are tested.

The data collected are analysed by using PLS-SEM methodology. PLS-SEM was used because of the complex structural equation model with a large number of constructs.

The main takeaway from this study is that when technological uncertainty is present in the working environment of a firm it leads to the development of digital explorative strategies. These digital explorative strategies have a large effect on the amount of IT capabilities present in the firm and these IT capabilities has proved to be a major influence on the ability to compete on prices offered by firms.

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INTRODUCTION

In 1968, Ted Hoff, a young Intel engineer discovered a method of integrating the circuits necessary for computer processing onto a tiny piece of silicon. This marked the invention of the microprocessor chip which allowed for a series of technological breakthroughs such as; desktop computers, networks, software and the Internet. Undisputedly this has transformed the business world to what we know it as today.

Digitalization, the use of technology to improve or shape new process & business models, is a hot topic for organizations around the world (Westerman, 2014). Companies on the forefront of digitalization use social media, artificial intelligence and big data to transform the way they conduct their business. Consider for example the use of digitalization and new business models by Uber (which has enabled them side-track existing taxi companies worldwide) or AirBNB (which has transformed the way travellers book accommodations around the world). Other companies, who are part of the early or late majority to adapt the digitalization are looking for ways to organize their companies in order to allow innovation to happen. The main driver of this disruption is technology combined with new business models as Westerman (2014) mentioned. This has led to technological uncertainty for companies who are active in the same industry. Having this technical uncertainty creates opportunities and threats for organizations and require firms to develop innovativeness orientation in order to keep up with the trend (Bensaou & Anderson, 1999).

A company can either apply digitalization to enhance their current business or use it to explore new markets and serve new customers. The latter is for a large number of companies and is an option which holds a sex appeal, ‘what if your company could revolutionize or even disrupt an industry?’ Jeff Dyer of HBR (2015) even goes further to state that it is a potential trap to replicate one’s existing business digitally. According to Dyer a company should focus on exploration when attempting to capitalize on the digitalization. In his word, “….If you

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6 think of a digital business model as an innovation, rather than as an extension of your core strengths, it becomes easier to think of the shift as an opportunity to take advantage of new capabilities, rather than leverage old ones.” (Dyer, 2015). Therefore, it is important as a company to have an explorative digital strategy, as this will aid the company in pursuing new options.

In order to capitalize on this digitalization, a company needs operational capabilities. As digitalization is all about the use of technology combined with business integration, companies need IT capabilities to manage these processes. IT capabilities are more than just the physical assets & capabilities. They are, more importantly, about business integration and management as this creates the true organizational value (Campbell & Peppard -2007).

As Porter (1985) mentioned, information technology has an impact on the competitive landscape. Thus IT capabilities should provide value and enhance firm performance. IT capabilities lowers process costs and output prices, connects business parties and increases business intelligence (G. Kim, Shin, Kim, & Lee, 2011). Lower output prices enable companies to compete on prices offered and can, therefore, be considered a competitive capability.

This paper will answer the research question Do innovativeness orientation along with

digital explorative strategies influence IT capabilities in the relationship between technological uncertainty and competitive capabilities?

The empirical evidence is provided through data collected from an online survey of employees who are involved with digital transformation within their company. The dataset consists of 98 completed responses from unique companies. The hypothesized relations

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7 between technological uncertainty, innovativeness orientation, digital explorative strategies, IT capabilities, Competitive capabilities are tested.

The thesis is structured as follows: Firstly, the literature review will establish current knowledge of the research model in existing literature. Secondly, the concepts and relationships between technological uncertainty, innovativeness orientation, digital explorative strategies, IT capabilities and competitive capabilities are discussed as separate constructs. This leads to the conceptual model and hypothesis of the proposed relations between the constructs. Next is the research methodology in which the conceptual model is empirically validated and tested using PLS-SEM. Following this, is a discussion of the results in which they are compared with existing research. Here, the managerial implications and limitations are given. The thesis wrapped up with an overall conclusion.

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1 LITERATURE REVIEW

In order to answer the research question, several related theoretical constructs need to be examined. In this chapter, the current status of scientific knowledge around the constructs is described. This includes the historical perspective, overview, and critique on the theories. The chapter starts by presenting the overall grand theory and capabilities in which the constructs will be framed. Next the constructs; Technological Uncertainty, Innovativeness Orientation, Digital Explorative strategies, IT capabilities and Competitive Capabilities will be outlined. Besides discussing these constructs independently, the relationships between the items will be discussed.

1.1 RBV AND CAPABILITIES

A grounded theory in strategic management is the Resource Based View (RBV) and this will be the grand theory in this study. The RBV assumes that performance differences between organizations arise from the collection of resources and capabilities they uniquely possess rather than their product-market positions (Wernerfelt, 1984). The most common description of resources in the RBV as made by Barney is ‘all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness’ (Barney, 1991). These resources have to be valuable, rare, un-imitable and non-substitutable (VRIN) in order to create rent generation differences across firms (Barney, 1991; 1986). Having VRIN resources will lead to a competitive advantage and thus can lead to a better firm performance.

Because capabilities are complex, structured, and multidimensional it is important to look at them from different perspectives or levels. Operational capabilities are the first

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9 apparent level, are, however, venerable to erosion and substitution and therefore do not provide a sustainable competitive advantage. Above all operational capabilities are superseded by higher level capabilities (Collis, 1994). Second level capabilities are characterized by the core capabilities of a firm. They bundle strategic important resources and capabilities of a firm to its competitive advantage. Lastly, the third level capabilities allow a company to constantly renew, reconfigure and rebuild resources, capabilities and core capabilities to face changing market conditions (Wang & Ahmed, 2007). The following subchapters will discuss all perspectives of the capabilities.

1.1.1 Zero and First Order: Operational Capabilities

Zero-level capabilities are defined by Winter (2003) as the ‘how we earn a living now’ capabilities i.e. the operational capabilities. These are stationary processes that enable a firm to collect revenue from their customers and reinvest them into new inputs. Capabilities which enable new product development or the opening of new psychical locations are labelled first order capabilities (Winter, 2003). However, companies do not compete head to head with new products but rather on a more substantial level, the capability to develop new products

(Prahalad & Hamel, 2006).

1.1.2 Second Order: Core Capabilities

The second order capabilities are formed by the core capabilities i.e. the integration of capabilities and resources in line with the firms strategic direction (Wang & Ahmed, 2007). These allow companies to have a competitive advantage at some point. Leonard & Barton (1992) adopt the knowledge based view and define a core capability as the knowledge set that distinguishes a company and thus, provide a competitive advantage. However, even core

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10 capabilities can prove irrelevant or even turn into core rigidities when a firm is faced with dynamic market changes (Leonard Barton, 1992).

1.1.3 Third Order: Dynamic Capabilities

In the dynamic nineties, the static proposition of the RBV was subject to change as it previously lacked in the influence of market dynamism (Eisenhardt & Martin, 2000). Therefore, the concept of dynamic capabilities, which enable one to adapt to the dynamic market situation is proposed. Teece et al define dynamic capabilities as ‘the firm’s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments’ (Teece, Pisano, & Shuen, 1997). Wang et al builds on this by pointing out point that dynamic capabilities are the ultimate organizational capabilities that provide long term competitive advantage (Wang & Ahmed, 2007).

1.2 TECHNOLOGICAL UNCERTAINTY

Technological uncertainty refers to unpredictability in technology in an industry and can be considered as part of the environment. Technological uncertainty explains the rate of change in underlying technologies of a product (Stump, 2002). The technological environment is perceived, interpreted and evaluated by human actors in organization (Daft, 2001; Hall, 1991). The technological environment is not fully rational as it is judged by human actors and thus, allows manager perception to become their reality, generating a self-fulling prophecy (Stump, 2002).

Technological uncertainty makes future developments difficult to forecast and presents additional threats. However, technological uncertainty, depending on endowed capabilities, could also provide new opportunities & threats for companies.

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11 The construct adopted in this paper on technological uncertainty is based on the work of Ellis et al (2010), were they defined technological uncertainty as: the rate of change in underlying technologies of a product. They found out like Bensaou & Anderson (1999) that having technological uncertainty in the environment a company operates will relate positively to new innovations (Ellis, Henry, & Shockley, 2010). In addition to previous arguments, when technological uncertainty is present a company must modify its capabilities or resources in order to stay competitive (Reed & DeFillippi, 1990). Failing to do so may turn these previously considered core competences into core rigidities (Leonard Barton, 1992). According to Leonard Bartin (1992) core rigidities can by mitigated by firms, by actively seeking and creating both breakthrough and incremental innovations.

Technological uncertainty primes innovation in firms (Auster, 1992) and emerging threats and opportunities arising from technical uncertainty require firms to develop innovativeness orientation (Bensaou & Anderson, 1999). Therefore, it expected that having technical uncertainty relates positively to having innovativeness orientation.

When firms are faced with unstable environments, such as when technological uncertainty is present, they are found to be more likely to exhibit strategic reorientation and therefore develop explorative strategies (Lant, Milliken, & Batra, 1992). Therefore, it can be expected that when a company is faced with technological uncertainty, it will develop new explorative strategies in order a have competitive advantage.

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1.3 INNOVATIVENESS ORIENTATION

Innovativeness has been the subject of extensive studies in several areas of behavioural science and social science. Innovativeness orientation is part of the research question and is an example of a dynamic capability. Markets are dynamic and therefore, the participating companies need to adapt to new market situations. Slater & Narver (1995) assert that a market orientation is necessary in order to achieve adaptation. Market orientation is an aspect of organizational culture, a learning orientation (Slater & Narver, 1995).

Hurley & Hult (1998) introduced two new constructs in the market orientation model. These two new constructions are innovativeness and the capacity to innovate. Innovativeness orientation is the openness to new ideas as part of the culture within the company. As introduced by Hurley & Hult (1998), this construct will be adopted in this thesis. Innovation as cultural antecedent is dependent on learning, participating, support and collaboration within a company (Hurley & Hult, 1998). The capacity to innovate was first introduced by Burns & Stalker (1961) and Hurley & Hult (1998) have drawn on this by adding that innovativeness within the company culture combined with resources creates a greater capacity to innovate.

This innovativeness enables companies to develop new products, solutions or capabilities. Innovation alone is not enough to provide long term survival for a company (Tushman, 1997). However, the capability to have an innovation orientation within a company will have a positive effect on the performance of an organization both internally and externally and will creates superior value (Schlegelmilch, Diamantopoulos, & Kreuz, 2003; Tushman, 1997). Therefore, it is expected that having an innovativeness orientation has a positive effect on the competitive capabilities of a company.

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13 Researchers have explored innovativeness against the explorative or exploitation elements of ambidexterity (Quintana-Garc a & Benavides-Velasco, 2008). Their findings indicate that having technological diversification, which will be present in an innovativeness orientation, has a stronger effect on exploratory capabilities. In addition, having a dynamic capability, like innovativeness and orientation may foster a higher level of exploration (Rosenkopf & Nerkar, 2001). Quintana-Garc a & Benavides-Velasco (2008) state that technological diversity may mitigate core rigidities as defined by Leonard Barton (1992) as novel innovations accelerate the rate of invention within a company. This allows a firm to depart from its past activities. The arguments, as presented by the previous authors in this paragraph, suggest that having an innovativeness orientation will relate positively to having digital explorative strategies.

It shows that firms that have more versus less innovation orientation are more likely to adopt a greater range of IT systems and use them more intensively in all their business processes (Sarkees, 2011). It can be assumed that by using this range of IT systems a firm also builds IT capabilities as defined by Bharadwaj (2000). Therefore, it can be expected that having an innovativeness orientation will lead to higher IT capabilities.

1.4 AMBIDEXTERITY & DIGITAL EXPLORATIVE STRATEGIES

Ambidexterity traditionally is portrayed as an organization’s capability to pursue two disparate things at the same time. For instance pursuing both manufacturing efficiency and flexibility (Carlsson, 1989). The concept of ambidexterity is widely recurring in present-day organizational literature. Successful companies in highly dynamic environments are ambidextrous i.e. they are both efficient and aligned for today’s challenges as well as adaptive to changes required to be still in business in the future.

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14 Tushman and O’Reilly defined ambidexterity as the “ability to simultaneously pursue both incremental and discontinuous innovation and change” (Tushman & O’Reilly, 1996). The concept of ambidexterity is elaborated by March (1991) as a set of adaptive processes in which a company simultaneously explore new possibilities and exploit old certainties and both compete for scarce resources, but both are vital for long-term firm survival. Exploitation is about efficiency, selection and implementation while exploration is about search, variation, experimentation and innovation (March, 1991). Exploitation (incremental) processes means an organization is enhancing the use of existing resources. Exploration (discontinuous) means that an organization is looking for new opportunities. In both definitions, learning, improvement, and acquisition of new knowledge are key (Gupta, Smith, & Shalley, 2006). Also, the need for balance between exploitation and exploration to achieve long term performance has been well established in its literature (Eisenhardt & Martin, 2000; Hill & Birkinshaw, 2006; March, 1991). However, Gupta et al (2006) also add a contrasting perspective. According to them, under certain conditions, it might feasible to be a company which is highly specialized in either exploitation or exploration.

Organizing for ambidexterity is dependent on the organization and the kind of strategy it intends to implant. Tushman and O’Reilly (1996) believe that a company should organize exploitation and exploration into different organizational units and thus create structural ambidexterity. Main stream business focus on the exploitation of existing assets and a separate business unit is focused on the exploration of new business units. Another way is to organize for ambidexterity by temporal ambidexterity. This can also balance exploitation and exploration within an organization. It allows an employee to shift between exploitative and explorative activities within the organization (Siggelkow & Levinthal, 2003). Gibson & Birkinshaw (2004) have a contradictive view and introduced contextual ambidexterity.

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15 Contextual ambidexterity is about the behavioural capacity of organizations to simultaneously demonstrate alignment and adaptability across an entire business unit. They suggest to organize ambidexterity not by task, structural or temporal separation but to organize a business unit context in such a way to encourage employees to judge how best to divide their time between exploitation and exploration (Gibson & Birkinshaw, 2004).

A study among 206 manufacturing firms has proved ambidexterity to be a positive influence on firm value (He & Wong, 2004). As acknowledged by the authors their research is limited to the context of technology innovation. He & Wong indicate that jointly pursuing exploration and exploitation yields synergies for firms. Other empirical research has also supported that ambidexterity leads to better firm performance (Junni, Sarala, Taras, & Tarba, 2013). However, there is also partially contradicting evidence by Settner & Lavie (2014), they claim that explore versus exploit modes via the internal organization, alliance, and acquisition modes undermine firm performance. This is because of negative transfer, conflicting routines, and limited specialization (Stettner & Lavie, 2014). They claim that exploring via acquisitions or alliances and exploiting via internal capabilities will enhance the firm performance. He & Wong (2004) have believe that an imbalance between exploitation and explorative strategies is negatively related to sales growth and subsequently, to a company’s performance. This might be explained by the fact that explorative strategies focus on learning and adopting new technologies which will not translate in new sales straight away.

The latest review regarding ambidexterity was undertaken by Zimmerman & Birkinshaw (2016) in which they created a multilevel perspective on capabilities and ambidextrous theories. Here, they link ordinary & dynamic capabilities and the need for structural and contextual ambidexterity as contributing to the sustained compatible advantage of an organization (Zimmermann & Birkinshaw, 2016).

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16 In this paper, digital explorative strategies will be used in order to answer the research question. As March noted: “The essence of exploration is experimentation with new alternatives” (1991:p85). Gupta (2006) adds to this by defining exploration as learning and innovation (i.e. the pursuit and acquisition of new knowledge). Lechner & Floyd look at it from a strategic perspective and defined it as follows; explorative strategies are intended to develop new capabilities and require much organizational learning (Lechner & Floyd, 2004).

No theory has been published specifically about digital explorative strategies. Therefore, the conceptualization of explorative strategies has to be extended in order to include the digital aspect. Where this paper refers to digital explorative strategies the following definition will be used: Digital explorative strategies are intended to develop either new digital capabilities or pursue digital transformation activities. This conceptualization is based on the work of Lecher & Flyod (2004) but now include the digitalisation aspect.

Kearns (2007) has found through a study among 269 firms that, companies who make IT investments in an explorative way are more likely to deploy resources in the search for new technology or capabilities (Kearns, 2007). It can also be argued the other way around. When a firm is searching for new technologies and capabilities, and thus displaying explorative behaviour, the firm will also be more likely to poses IT capabilities as conceptualized by Bharadwaj (2000) in order to realize their explorative strategies. Therefore, it is expected that having digital explorative initiatives will relate positively to IT initiatives.

1.5 IT CAPABILITIES

IT capabilities are an example of these operational capabilities as they allow a company to operate either by facilitating production processes via ERP systems or by being the production resource itself as in the case when software is programmed. Porter (1985) had

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17 recognized early, the value of using information systems and the impact it would have on the competitive landscape.

However, IT capabilities come in many different forms and shapes and are part of a rapid developing knowledge field and therefore need to be conceptualized. An early attempt to define IT capabilities is made by Morton (1988) which referred to mainly physical IT capabilities such as worker stations, communications technology, computers, codifying intelligence into microchips and robotics (Morton, 1988). There is little notion about knowledge or management abilities in IT capabilities. Bharadwaj (2000) defines it as: “its ability to mobilize and deploy IT-based resources in combination or co-present with other resources and capabilities.”. Bhradwaj (2000) firmly embeds IT resources firmly within the RBV by adopting the Grant classification scheme which include: 1) the tangible resource of IT infrastructure components, 2) the human IT resources consisting of managerial and technical skills and 3) the intangible IT resources such as knowledge and synergies.

This is in line with a more recent view on IT capabilities by Kohli and Grover (2008) which state that IT capabilities are made of 1) IT resources both human & technical 2) Intangible IT artefacts like IT strategy, knowledge. This implies that IT capabilities are build up out of several dimensions.

According to Kim (2011) IT capabilities constitute of three primary dimensions: IT infrastructure flexibility, IT personnel expertise, and IT management capabilities. This is in line with the taxonomy (physical, human, organizational aspects) suggested by Barney (1991). IT personnel expertise is defined as skills, knowledge and technology management needed to undertake IT tasks. IT infrastructure refers to the IT assets (such as software, hardware and data), systems and networks while IT infrastructure flexibility enables staff to change or update the said IT infrastructure (Byrd & Turner, 2000). IT management capability

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18 is IT staff’s ability to transform and manage IT resources into business value for organizations (Campbell & Peppard, 2007).

The previous paragraphs illustrate that there are many conceptualizations of IT capabilities present in the literature with different dimensions. However, there are two main dimensions apparent in most conceptualizations: Internally focussed IT capabilities and Externally focused IT capabilities (Dale Stoel & Muhanna, 2009). As Porter (1985) mentioned, information technology has an impact on the competitive landscape. Thus, IT capabilities should provide value and enhance firm’s performance. Psychical, IT capabilities, like hardware or software tools alone do not create value in isolation but have to be part of a value creating process. This value creating process has to operate in a synergistic manner with other organizational factors (Wade & Hulland, 2004). This implies that being able to generate value revolves around IT management as mentioned by Campbell & Peppard (2007).

Bharadwaj (2000) argues that from a RBV perspective IT capability is a rent generating resource which is VRIN. (Bharadwaj, 2000). Bhatt and Grover (2005) emphasised this by stating that by leveraging IT and complementarities resources, capabilities can be created that are heterogeneous and imperfectly mobile and thus can generate a sustained competitive advantage. Finally, in line with RBV arguments IT capabilities which are a source of competitive advantage must be considered relative to other firms in the same industry. The continuous development of IT capabilities is necessary when faced with change or when competitive pressure is present in order to sustain the competitive advantage (Dale Stoel & Muhanna, 2009).

However, there are also authors who are critical on the (sustained) advantages of IT capabilities. Carr (2003), one of such authors claims that Information Technology is overrated and leads to destruction of company value. He bases his arguments on the fact that scarcity not ubiquity is the main generator of competitive advantage. By now, core IT functions (data

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19 storage, data processing and transport) have become a commodity (Carr, 2003). The author does raise a valid point that physical IT capabilities are prone to commoditization and are in themselves not a sustainable competitive advantage. This argument can be extended by looking at new cloud based providers of computing power and storage such’s Amazons AWS or IBM. This makes high-end physical IT capabilities available to the general public instead of it being reserved for large corporations with large budgets. However, in line with the argument of Campbell & Peppard (2007), IT capabilities are more than just the physical assets & capabilities but are more importantly about business integration and management, as this creates the true organizational value. Therefore, Carr’s argument that information technology leads to destruction of company value can only be considered as partially true.

In this paper, Bharadwaj et al (1999) is adopted as conceptualization of IT capabilities and they are conceptualized by six dimensions which include; IT–business partnerships, external IT linkages, business IT strategic thinking, IT business process integration, IT management and IT infrastructure (Anandhi S Bharadwaj, 1999). This paper was chosen because of the large number of dimensions which allow one to investigate which IT

capabilities are important with a certain level of detail and also uses the taxonomy of physical, human and organizational aspects as set by Barney (1991).. Each of the dimensions as laid out by Bharadwaj (1999) will now be discussed.

IT business partnerships are about the ability to adapt and create rich partnerships between technology user (business unit managers) and technology provider (IT

professionals). It fosters the ability to blend business and IT experience while working in multidisciplinary teams (Henderson, 1990).

External IT linkages refers to the technology based linkages between key stakeholders (e.g. suppliers, customers and other partner organizations) and the firm. This creates

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inter-University of Amsterdam, Amsterdam Business School.

20 organizational networks in order to facilitate sophisticated interactions, create knowledge and share information (Zaheer & Venkatraman, 1994).

Business IT strategic thinking encapsulates the management’s ability to envision how IT contributes to business value and the ability to integrate IT with the organizations business strategies. The basis of this dimension is built on the fact that the need for integration between IT and business strategy is necessary because IT affects firm strategies and that strategies have IT implications (Quinn & Baily, 1994).

Business process integration refers to the ability to adapt IT work processes and existing business to continually increase their effectiveness and efficiency. This allows one to leverage the capabilities of emerging information technologies (Davenport, 1993).

IT management captures the activities related to management’s activities of IT. This is about IT planning and design, project management, establishing of IT standards and application delivery. How IT management is done has a significant impact on the firm’s overall success with IT itself (Boynton, Zmud, & Jacobs, 1994).

IT infrastructure refers to the physical aspect of IT capabilities such as data, network and processing architecture (Duncan, 1995). Part of this dimension is the quality and reliability of the infrastructure. As mentioned by Carr (2003), this dimension is prone to commoditization and does not offer a sustained competitive advantage anymore.

Because IT capabilities can be considered as a VRIN resource, it should have a direct effect on firm’s performance. The adoption and intensity of the use of IT capabilities increase firm’s performance (Anandhi S Bharadwaj, 1999; Barua, Kriebel, & Mukhopadhyay, 1995). Bharadwaj (2000) did an early empirical analysis which shows an association between superior IT capabilities and superior firm’s performance which is positive and significant. Kim et al (2011) have also found a positive effect of IT capabilities on financial performance. While it is great that performance increases when firms possess IT capabilities, there are

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21 underlying effects why IT has such a positive impact on a firm’s performance. Overall, published empirical studies found out that using the economic production function that IT investments have a significant impact on productivity (Kohli & Devaraj, 2003). Mitra and Chaya (2015) found in an empirical study under 400 businesses in the US that higher IT investment levels are usually associated with lower production costs and lower total operation costs (Mitra & Chaya, 2015). IT capabilities lower process costs, connects business parties and increase business intelligence (G. Kim et al., 2011). It can be assumed that having higher IT investments will also result in having IT capabilities and that having lower production costs and total operation costs will also result in lower prices offered to the market. Therefore, it is expected that having IT capabilities will also relate positively to competitive capabilities pprices offered.

1.6 COMPETITIVE CAPABILITIES

To succeed as a company in the competitive landscape a competitive advantage is needed and this can be achieved by having competitive capabilities. Porter (1985) has conceptualized competitive advantage by stating that it is the heart of a firm’s performance in competitive markets. He addressed the context the industry in which the organization is competing and the internal aspect of competitive strategy an organization develops in order to better compete (Porter, 1985). In order to develop a specific competitive advantage a company can assess the key capabilities on basis the VRIN criteria as established by Barney (1991) in the resource based view.

Porter (1980) established three main generic competitive strategies in order to have a better position in the industry. They include cost leadership, differentiation and focus and a firm can take more than one approach. With each approach comes a different path which

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22 helps to gain competitive advantage. As competitive advantage lies in the heart of any strategy making process, selecting the right approach and scope of the firm makes a difference in performance (Porter & Strategy, 1980). Previous studies have found out that cost leadership (S. W. Kim, 2009; Oghazi, 2009; Rosenzweig, Roth, & Dean, 2003) and differentiation (S. W. Kim, 2009; Oghazi, 2009) are more commonly used to measure competitive capabilities.

Competitive capabilities are reasons why organizations attract customers. They provide differentiation between the company and the competition (Tracey, Vonderembse, & Lim, 1999). According to the authors, the competitive capabilities are not directly controllable by the management of the organization but are rather the outcome of critical management decisions. They explain that competitive capabilities exist in four dimensions which include price offered, quality of products, product line breath and delivery capabilities.

According to Kim (2009) there is an interactive relation between the competitive capability and practical capability of a supply chain. This has a direct relationship with the firm’s performance in the studied Japanese organizations. But this relationship is indirect- through supply chain integration in Korean firms (S. W. Kim, 2009). Ogazi (2009) has found out that competitive capabilities have a direct positive effect on firm performance. This was taken from a sample of several organizations in Sweden who are active in different industries (Oghazi, 2009). Both Kim (2009) and Oghazi (2009) found out that having competitive capabilities have direct positive effect on a firm’s performance.

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2 PROPOSED THEORETICAL MODEL

The research design revolves around the research question: Do innovativeness orientation

along with digital explorative strategies influence IT capabilities in the relationship between technological uncertainty and competitive capabilities?

2.1 THE VARIABLES & HYPOTHESIS

The theoretical model consists of variables and hypothesis. The following sub-chapters will talk about each variable and explain how the variables are linked together.

2.1.1 Technological Uncertainty

Technological uncertainty refers to unpredictability in technology in an industry. The construct is based on technological uncertainty based on the work of Ellis et al (Ellis et al., 2010). Technological uncertainty makes future developments difficult to forecast and presents additional threats. However, technological uncertainty, depending on endowed capabilities, could also provide new opportunities & threats for companies. Technological uncertainty in this study is used in order to measure the perceived digitalization within an industry. The main driver of digitalization is technology as Westerman (2014) noted. This could create unstable environments in which companies are active. When firms are faced with unstable environments, like when technological uncertainty is present, they are found to be more likely to exhibit strategic reorientation and therefore develop explorative strategies (Lant et al., 1992). This makes sense because when companies are faced with uncertainty they are trying to look for solutions in order to get a grip on the uncertainty. Companies can do this by reorienting and developing strategies which leads them to explore activities like the development of new products outside the current scope.

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24 Technological uncertainty also primes innovation in firms (Auster, 1992) and emerging threats and opportunities arising from technical uncertainty requires firms to develop an innovativeness orientation (Bensaou & Anderson, 1999). This is recognizable in day to day businesses and brings new treats and opportunities which need to be mitigated. More importantly, technical uncertainty will force companies to create an answer by starting innovation processes, which in term stimulate an innovativeness orientation.

This leads to two hypotheses:

H1: Having technological uncertainty will relate positively to having an innovation orientation.

H2: Having technological uncertainty will relate positively to having a digital explorative strategy.

2.1.2 Innovativeness Orientation

Innovativeness orientation is the openness to new ideas as part of the culture within the company (Hurley & Hult, 1998). According to Hurley & Hult (1998), this innovativeness enables companies to develop new products, solutions or capabilities.

Rosenkopf & Nerkar (2001) state that having dynamic capabilities, like innovativeness orientation, may foster a higher level of exploration. In line with the previous argument researchers have explored innovativeness against the explorative or exploitation elements of ambidexterity (Quintana-Garc a & Benavides-Velasco, 2008). Their findings indicate that having technological diversification, which can be present with an innovativeness orientation, has a stronger effect on exploratory capabilities. Therefore it can be argued that innovativeness orientation and digital explorative strategies are related.

Sarkees (2011) established a link between innovativeness orientation and the use of IT systems within their businesses. Innovation alone is not enough to provide long term survival

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25 for a company (Tushman, 1997). Which makes sense from a managerial point of view because when a company is focused solely on innovation and neglects to focus on selling those innovations it will cease to exist within a short time frame.

The capability to have innovation as separate element within a company will have a positive effect on the performance of an organization both internally and externally. This is because innovation enables a company to launch new products, solutions or capabilities which add to the financial performance of the company. In this study, the competitive capabilities of prices offered are central. The literature suggests that having an innovativeness orientation will have a positive effect on the performance of an organization both internally and externally and creates superior customer value (Schlegelmilch et al., 2003; Tushman, 1997). This also implicates that it will offer an advantage for the prices offered by the firm. Therefore, it can be argued that innovativeness orientation is positively related to competitive capabilities prices offered.

This leads to three hypotheses:

H3: Having innovativeness orientation will relate positively to having digital explorative strategies.

H4: Having innovativeness orientation will relate positively to having IT capabilities. H6: Having innovativeness orientation will relate positively to competitive capabilities prices offered.

2.1.3 Digital Explorative Strategy

As there is no prior literature specifically about digital explorative strategies the following proposed conceptualization is used: Digital explorative strategies are intended to develop either new digital capabilities or pursue digital transformation activities. In order to measure the amount of exploration present within a company the construct of Jansen et al (2009) is adopted. The construct was adapted in order to measure the amount of digital explorative

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26 strategies a company has. The items were edited by adding the digital elements. For example “We frequently utilize new opportunities in new markets” in the original article by Jansen became “We frequently utilize new digital opportunities in new markets” (Jansen, Tempelaar, Van Den Bosch, & Volberda, 2009). As empirically proven by Kearns (2007), companies who make IT investments in an explorative way are more likely to deploy resources in the search for new technologies. Therefore, it can also be argued the other way around i.e. companies who deploy resources in the search for new technologies are also more likely to utilize IT capabilities as defined by Bharadwaj (2000). This will make sense from a managerial point of view, as companies who want to deliver new digital products or services need to invest in their realization, maintenance and delivery. A logical way to do this would be to have IT capabilities.

This leads to one hypotheses:

H5: Having digital explorative strategies will relate positively to having IT capabilities.

2.1.4 IT Capabilities

IT capabilities allow a company to operate and can therefore, be considered as an operating capability. In this study, the construct of IT capabilities as created by Bharadwaj (1999) is adopted. IT capabilities is a multidimensional construct consisting of six dimensions: IT– business partnerships, external IT linkages, business IT strategic thinking, IT business process integration, IT management and IT infrastructure (Anandhi S Bharadwaj, 1999).

The adoption and intensity of the use IT capabilities increase a firm’s performance (Anandhi S Bharadwaj, 1999; Barua et al., 1995). Bharadwaj (2000) did an early empirical

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27 analysis which shows an association between superior IT capabilities and superior firm performance which is positive and significant. While it is great that performance increases when firms possess IT capabilities, there are underlying effects why IT has such a positive impact on a firm’s performance. This is logical as IT capabilities themselves don’t generate value, how can IT management or IT outsourcing add directly to the bottom-line of a company? Having IT management or IT outsourcing will have a positive effect on more elementary things like the speed by which the company can act or because of optimized processes.

Empirical studies have found that IT has a significant impact on the productivity within firms (Kohli & Devaraj, 2003). Kim et al (2011) added to this by stating that IT capabilities lowers process costs, lowers output prices, connects business parties and increase business intelligence (G. Kim et al., 2011). Higher productivity lowers production costs, total operation costs and thus, allows a company to use lower output prices and therefore have more competitive capabilities based on prices offered (Andersson, Johansson, Karlsson, & L f, 2012). Lower output prices enable companies to compete on prices offered and can therefore be considered a competitive capability.

This leads to one hypotheses:

H7: Having IT capabilities will relate positively to Competitive Capabilities Prices Offered

2.1.5 Competitive capabilities

Competitive capabilities are reasons organizations attract customers. The construct adopted regarding competitive capabilities is from Tracey et al (1999) and they state that competitive capabilities provide differentiation between the company and the competition (Tracey et al.,

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28 1999). According to them, the competitive capabilities are not directly controllable by the management of the organization but are rather the outcome of critical management decisions. Previous studies have found out that cost leadership (S. W. Kim, 2009; Oghazi, 2009; Rosenzweig et al., 2003) is commonly adopted in order to measure competitive capabilities. Cost leadership doesn’t mean that they will offer the lowest priced products or services. They can use these lower production costs to achieve a higher than average profitability. However most common cost leader companies do compete on price and are very effective at it because of their lower cost structure and management (Stahl & Grigsby, 1997).

2.1.6 Control variables

The research will feature common control measures to provide further insights on the findings. As this will help to accurately and properly see the impact on the variables of interest. This will reduce the risk on committing a Type II error in which a false effect on a variable is ascribed, or more abstractly speaking a false null hypothesis is retained (e.g. a false negative) (Lieberman & Cunningham, 2009).

In this study, firm size and organizational lifetime are used in order to differentiate between several sizes of firms and the life time of an organization and relate this to the results. These scales are self-developed. The scales of firm size range from less than 20 employees to 200 or more employees. The scale of organizational life time ranges from less than 5 years to 50 years or more.

The industry in which a firm is present is adopt from the Dutch industry classification codes (SIC Codes). This names 21 industries in which every company should be able to place itself.

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29 The responded job title is also one of the control variables. This is important to know in order to understand their understanding and influence on digital transformation. A CEO could have a broader perspective on digitalization in his industry than an operational employee {Sanders: 2005hd}. The scale used to measure this control variable is adopted from Sanders (2005).

2.2 PROPESED THEORETICAL MODEL

The proposed design of this study is presented in the model below:

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3 RESEARCH METHODOLOGY

The previous chapter was about the theoretical model which is empirically tested in this thesis. This chapter will discuss the research methods, survey, measures and data analysis.

3.1 RESEARCH METHOD

The main objective of this thesis is to investigate linkages between the items in the model. Therefore, no qualitative elements were added to the survey. This section provides an overview of the research methods used in testing the proposed research question. In order to examine the proposed model and related hypothesis a self-administered survey was used. The research was done with a cross sectional nature and it featured convenience sampling. Reliance on a convenience sample also introduces a limitation in that the survey may not be representative of the underlying population (e.g. those who did not participate in the survey). The survey was based on existing theory and constructs and they will be validated & examined, thus, adopting an objectivist approach (otherwise known as a quantitative study).

This thesis is part of a larger project conducted under supervision of Dr. S. Kortmann, regarding digital transformation.

3.2 SURVEY BASED RESEARCH & SAMPLE

Administrating a quantitative survey is possible by various methods such as self-administration by the participant or administering participants an interview either personally or by phone (Leung, 2001). In order to minimize the problem of common method variance constructs were displayed in a random order.

The respondents were involved with digital transformation within their company. They are active on any level within the organization ranging from team members to C-level executives. To increase generalizability of results, focus was applied on companies who were

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31 active in diverse industries. To avoid over representation of one company, which could influence the findings, responses from the same company were dropped.

Responds from a broad range of industries were engaged by actively asking for their participation while an announcement of the survey was distributed on several social media. The data were collected over a period of four weeks. Based on case wise deletion, the final

sample size was 98 unique and completed cases.

Relying on a popular rule of thumb, in establishing the minimum sample size, a minimum of ten times the largest numbers of predictors for any dependent variable should be used (Barclay, Higgins, & Thompson, 1995; Gefen, Straub, & Boudreau, 2000). The data will be analysed by using PLS-SEM methodology which is known for its robustness to small sample sizes (Karahanna, Agarwal, & Angst, 2006).

3.3 PILOT SURVEY

Before the main survey was distributed, a pilot survey was conducted to verify that the questions are understandable to participants and to verify the integrity of the survey (Kitchenham & Pfleeger, 2002). According to them, there are two methods in order to evaluate the instrument. The first is the use of a pre-test (pilot study) while the other is the use of a focus group. In order to validate this survey, a pre-test was used in which the survey was distributed to 10 participants who have completed the survey. Participants were knowledgeable in the digital transformation domain and were part of our target audience as recommended by literature (Straub, Boudreau, & Gefen, 2004). Their feedback was used in order to improve the survey and finalize this for distribution. By applying this instrument evaluation face, validity of the measurement model is established and thus allows for generalization towards the target audience (Straub et al. 2004, p. 424).

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3.4 MEASURES

The construct of technological uncertainty is measured by the work of Atuagene et al (2005). The construct contains four items and features a Cronbach alpha of 0.9. It features a 5 point likert scale where 1 = strongly disagree and 5= strongly agree (Atuahene Gima, Slater, & Olson, 2005).

Innovativeness orientation, the openness to new ideas, is based on the work of Kortmann (2015). The Cronbach alpha of this measure as reported is 0.91. This measure contains a total number of six items and the scale consists of a 7 point Likert scale ranging from Strongly Agree to Strongly disagree (Kortmann, 2015).

Explorative Digital Strategy (EDS). refers to whether a company has a digital explorative strategy by which it tries to find new opportunities. Therefore, it is key to measure level of ambidexterity within the organization and in particular if it has an explorative digital strategy. This can be measured as a two-step approach, - as it consists of both exploitation and exploration - by using eight items adopted from Jansen et al (2009) and features α=0.86 originally. As mentioned in the construct, the questions are modified in order to measure the digital aspect. The response scale consists of a 7 point Likert scale ranging from strongly agree to strongly disagree.

In the Bharadwaj et al (1999) paper, IT capabilities are conceptualized by six dimensions: IT–business partnerships, external IT linkages, business IT strategic thinking, IT business process integration, IT management and IT infrastructure (Anandhi S Bharadwaj, 1999). In this research Bharadwaj et al (1999) is adopted as conceptualization of IT capabilities (α=0.64). The extent to which a company has IT capabilities will be measured by the earlier mentioned five out six dimensions of Bharadwaj et al (1999). The dimension of IT infrastructure will be dropped. This is based on the fact that psychical infrastructure has become a commodity as by Carr (2003) and thus, will not provide differentiating possibilities

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33 for companies. The concept of IT will be measured by 21 items adopted from Bharadwaj et al (1999). The response scale consists of a 5 point Likert scale ranging from poorer than most to exceptionally well.

The construct of Competitive capabilities is based on the work of Tracey et al (1999) and will be adopted as measure. This measure consists of four dimensions which include Product line breadth (α=0.8425), Price offered (α=0.789), Quality of products (α=0.8588) and Delivery Capabilities (α=0.9292). However only the dimension of prices offered will be measured. This was done in order to simplify the model and because of the linkages found in the theory that IT capabilities allow companies to compete based on prices.

3.5

DATA ANALYSIS STRATEGY

The data is analysed by using PLS-SEM methodology which provides multiple advantages. PLS-SEM places minimal demands on sample size and handles different residual distributions well (Karahanna et al., 2006). Itis suitable for complex structural equation models with a large number of constructs and does not require normally distributed input data (Urbach & Ahlemann, 2010). The method also allows for multiple relationships of dependence and independence among latent variables and is used most commonly in conjunction with survey based research (Nitzl, 2015). Based on the criteria for method selection proposed in Starstedt et al (2014) the choice for analysis by PLS-SEM was made. The model consists of many constructs and has many indicators per construct, thus in this research setting the use of PLS-SEM is favoured (Sarstedt, Ringle, Smith, Reams, & Hair, 2014).

The PLS-SEM model consists of two elements, a structural model (also called the inner model) which signifies the relations between constructs and a measurement model (also known as the outer model) which exhibits the relationship between constructs and indicators (Joseph F Hair, Hult, Ringle, & Sarstedt, 2016a). Assessing the structural and measuring

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34 model in PLS is done on a set of non-parametric assessment criteria, such as bootstrapping or blindfolding (Joe F Hair, Ringle, & Sarstedt, 2014).

The constructs and its indicators in the model can be modelled either as formative or reflective (Gefen et al., 2000). Formative indicators are seen as causes of the underlying construct and they represent different dimensions of the specific construct. In contrast reflective constructs measure a underlying phenomenon and ought to be correlated with each other (Gefen et al., 2000).

We evaluate the structural model (Urbach & Ahlemann, 2010). This will be done in chapter 3.5.2 and 3.5.3.

3.5.1 Dataset preparation

Before the data analysis starts it is important to prepare the data. A total of 344 respondents had started with the survey, providing information on the introduction section of the survey and control variables. Less than one-third of the respondents provided complete responses as the survey was quite long (average completion time around 25 minutes)..This survey was part of a larger project which shared the same survey. Therefore, lower completed response rates were expected.

As stated in chapter 2.3.2 it is important to have unique cases in the data set, in order not to have any over-representation of companies or industries. Therefore, the dataset was first screened on missing company names as some respondents had elected to leave out their company name. In some cases, this information could be restored because of other data entries made by the respondent (E.g. by filling in their company email address). Secondly all company names were sorted and screened for correctness, as some had spelling errors in them or were written differently (e.g., using acronyms). These steps made it possible to select unique companies to keep in the dataset. In cases of double entries from the same company,

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35 criteria were developed to select which companies are being kept. The cases with the highest percentage of completed questions would be kept and in case of an equal percentage completed questions the cases would be used from the respondent with the highest-ranking position within the company. This is based on the argument that these individuals would most likely be familiar with digital transformation on a strategic level and thus are of most value for this dataset. There were sixteen (16) multiple entries from various companies which were deleted based on the setup criteria.

Missing values are not accepted when using a SEM analysis via PLS (Sarstedt et al., 2014). Therefore, a case wise deletion was applied to the dataset. Thus only cases that do not contain any missing data for the variables selected in the model were used. This reduced the data set to 98 unique records which could be used for data analysis.

Also, the analysis of outliers is an important aspect and should also be verified & treated before using PLS-SEM analysis. In this case the results indicated some influential observations but no outliers were detected.

3.5.2 Assessment of the measurement model

The assessment of the measurement model, or the relation between constructs and the related indicators, involves several steps (Joe F Hair et al., 2014). Assessing reflective items on the other hand requires two checks: convergent and discriminant validity (Gefen et al., 2000). Convergent validity can be assessed by the examination of average composite reliability and indicator reliability (Fornell, 1982). Discriminant validity, on the other hand can be assessed by average variance extracted (AVE), that must typically be over 0.5. Table 3.2 shows the construct and their type.

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Constructs Type No of indicators

Technical uncertainty Reflective 4

Innovation orientation Reflective 6

Digital explorative strategies Reflective 4

IT capabilities – External IT Linkages Reflective 3 IT capabilities – IT business partnerships Reflective 5 IT capabilities – Business IT strategic thinking Reflective 3

IT capabilities – IT management Reflective 7

IT capabilities – IT business process integration Reflective 3 Competitive capabilities - Price offered Reflective 4

Table 3.2 Type of construct

Construct 1: Technical uncertainty

The construct’s technical uncertainty consists of four items and is modelled as a reflective construct. All items of this construct were loaded above the 0.7 threshold and were significant, the loadings per item can be found in Appendix C.

Skewness & kurtosis tests were performed and are reported in Appendix C. Kurtosis reports whether the distribution is too peaked or flat (Joe F Hair et al., 2014). Skewness assess whether the distribution of a variable is symmetrical. The guideline for skewness states that the number should be between -1 and + 1 and if exceeded will mean that the data is substantially skewed. A kurtosis of less than -1 indicates a flat distribution while a kurtosis of +1 indicates a too peaked distribution. A case where excess kurtosis and/or skewness is present the data is non-normal (Joseph F Hair, Hult, Ringle, & Sarstedt, 2016a).

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37 In this case TU_2 (Kurtosis 1.175 & Skewness -1.249) shows non-normality. However, this doesn’t pose an issue as the degree of skewness and kurtosis is not severe and therefore the items are retained.

The average variance of 0.787 extracted is good as this is well above the conventional threshold of 0.5 (Joe F Hair et al., 2014). This indicates that the discriminant validity of the construct is high. Similarly, composite reliability is also high (CR=0.937), well above the threshold of 0.7. Thus concluding there is convergent and discriminant validity for this construct.

Construct 2: Innovation orientation

Innovation orientation is a reflective construct that consists of six-items. In this case the data is considered as normal as there is no excess kurtosis or skewness. Firstly, the loading of all items was checked and this resulted in the removal of item IO_5. The average variance extracted is good (AVE = 0.644) and thus well above the established threshold of 0.5. Composite reliability of this construct is high (CR = 0.900). Therefore, there is convergent validity and discriminant validity for this construct.

Construct 3: Digital explorative strategies

This reflective construct consists of four-items which all load significantly on the construct, well above the 0.7 threshold. The average variance extracted is good (AVE = 0.724). The composite reliability is high (CR = 0.913). This concludes that there is convergent validity and discriminant validity for this construct.

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38 Construct 4: IT capabilities

IT capabilities is a second order construct which exists of five separate constructs. All items except one associated with the constructs, load well above 0.7 threshold. Item ITC_ITM3 had a loading of 0.652, as this is only slightly below the threshold the decision was made to retain the item in order to retain data. Table 3.3 reports all constructs and their respective average variance extracted and composite reliability, which are all well above the established thresholds. That concludes that there is convergent validity and discriminant validity for IT capabilities.

The skewness and kurtosis were within acceptable ranges.

AVE CR

IT capabilities 0.576 0.966

IT business partnerships 0.666 0.909

External IT linkages 0.784 0.917

IT business process integration 0.815 0.928

IT management 0.700 0.929

Business IT strategic thinking 0.880 0.956

Table 3.3 – IT capabilities Ave and CR

Construct 5: Competitive capabilities

The competitive capabilities construct has three items associated with it. The loading of CC_PO_1 was too low (0.466) and thus well below the threshold. Therefore, the item was removed. The average variance extracted is good (AVE = 0.891). The composite reliability is high (CR = 0.942)