Master Thesis
Financial effect of ERP implementations regarding firm type and country development
Gui-Yu, Wong
January 10th, 2014
University of Groningen: S2367890 Uppsala University: 850328-P134
g.wong@student.rug.nl
Supervisor: Dr. Wim Westerman Assessor: Dr. H.W.J. Vrolijk
Msc International Financial Management Faculty of Economics and Business
University of Groningen
Msc Business and Economics Faculty of Social Science
Uppsala University 14/1/10 4:21
Abstract
In 1990, Gartner Group Inc. proposed an idea so-called enterprise resource planning (ERP). In the following decades, in order to respond to the changeable market and obtain globally integrated information, most companies strive to reinforce their competitive advantages by investing in ERP implementations. The considerable previous literature has examined the impact of ERP implementations on corporate financial performance. Yet, the findings remain inconclusive. This study first reexamines the financial effect of ERP implementations with a longer period (five years) as an observation window. Then, the study tends to put an insight into the comparisons of financial performance delivered by ERP implementations with regard to firm type and country development. In total, 280 ERP adopting companies are sampled from Asia and Europe, and the financial information of these adopters from 1990 to 2012 are analyzed by both quantitative and qualitative methods.
Overall, the statistical results imply the financial effect of ERP implementations is not significantly reflected by the ratios of either cost-related performance or profit-related performance, while the empirical opinions from the interviewees confirmed the perceivable financial benefits on cost reduction and efficiency improvement by ERP implementations. Firm type and country development are not found to be significant factors to the adopters’ financial performance in post-implementation period; nevertheless, firm type and country development do matter during ERP implementations, and further indirectly affect the long-term financial benefits. The results are jointly discussed to illustrate the understanding on the financial effect of ERP implementations regarding firm type and country development. Based on the discussion, some implications are provided from the perspective of financial management.
JEL Code: G30, L25, O16
Keywords: ERP implementations, financial performance, firm type, country development
Tables of contents
Abstract I
Tables of contents II 1. Introduction 01
1.1. IT plays a critical role in business operation 01 1.2. ERP systems as a solution 02
1.3. Reasons for implementing ERP systems 03
1.4. Financial performance and ERP implementations 04 1.5. Research outline 05
2. Literature review 06
2.1. General perception of ERP systems – Definition review 06 2.2. ERP implementations concerning various factors 07 2.3. Inconclusive financial effect of ERP implementation 08 2.4. Hypothesis development 09
2.5. Indicators of financial performance 12 3. Methodology 14
3.1. Data selection and description 14 3.1.1. Sampling 14
3.1.2. Descriptive statistics 15 3.2. Research methods 17
3.2.1. Statistical analyses 18
3.2.1.1. Comparison of pre- and post-implementation performance 20
3.2.1.2. Comparison of the subgroups of firm type and country development 20 3.2.1.3. Multiple regression analysis 21
3.2.2. Interviews 23
3.2.2.1. Financial perspective 23 3.2.2.2. ERP consultant perspective 24 4. Results 25
4.1. Results of Hypothesis 1 – financial effect of ERP implementations on the adopters 25 4.2. Results of Hypothesis 2 – the performance comparison of DCs vs. MNCs group 29
4.3. Results of Hypothesis 3 – the performance comparison of Developing vs. Developed group 31 4.4. Results of the multiple regression analysis 33
4.5. Results of the interviews 35
4.5.1. Opinions from the financial specialist 35 4.5.2. Opinions from the ERP architect 36 5. Discussion 39
6. Conclusion 44
6.1. Summary of the study 44
6.2. Management implications of the study 45
6.3. Limitations of the study and suggestions for future researches 46 7. Reference 47
Appendices 52
1. Introduction
1.1. IT plays a critical role in business operation
In the late 20th century, the quantum leap of information technology (IT) has led the world to step into a new age, usually called the information era. From the early beginning of IT was widely applied, Porter (1980; 2008) has stressed that IT influences the business by accelerating the process of information. Holland and Light (1999) deemed that IT could support the management to promote the organizational abilities to cope with changing business environment. To date, to strengthen the competitive advantages in the competitive global market, more and more IT techniques are introduced or are applied to improve organizational performances in the business fields, especially since the cost of deploying IT systems has kept decreasing over time (Lee et al., 2011). Along with the rapid growth of Internet and information explosion, IT system investment has become critical for companies to seek, maintain, or reinforce organizational abilities.
In the inevitable globalization trend, new business conceptions such as E-commerce and supply chain management burgeoned to stimulate some emerging business models followed by substantial profitable opportunities (Yan, 2009). From the 1990s onwards, researchers have put a lot of efforts on exploring the impact of IT on business by using different dimensions. For example, some scholars focused their works on the relationship between IT and productivity, and they found that the rising productivity is attributed to the increase of IT investment and the prevalence of Internet (Brynjolfsson, 1993; Brynjolfsson and Hitt, 1998;
Oliner and Sichel, 2000); Banker et al. (2006) adopted the media richness theory to demonstrate the role of information software in the organizational performance; Arnold et al.
(2000)’s work suggested that the business process reengineering caused by adopting IT systems may lead to a decrease in employee productivity due to their estimations of position declined and task computerized; furthermore, in the recent years, the firm performance associating with the relationship between IT and innovation attracts a lot of attention from researchers (Cooper, 1998; Dewett and Jones, 2001; Koellinger, 2008; Ray et al., 2005). In general, through the long period of development time in the last decades, IT has been identified as an important resource for aiding companies not only to enhance core competitive advantages, but also to raise the business value by appropriately aligning with the organizational strategies (Aral and Weill, 2007; Dedrick et al., 2003; Melville et al., 2004; Oh and Pinsonneault, 2007; Ravichandran & Lertwongsatien, 2005).
With the aim of adequately utilizing organizational IT capabilities, IT management and IT governance are considered as administrative notations that concern the allocation of IT
resources, decision-making power and responsibilities within a company (Weill and Ross, 2004a). Many previous studies have provided evidence to indicate that effective IT governance has positive influence on the corporate performance (Peterson, 2004; Ross et al., 1996; Schmidt and Buxmann, 2011; Weill and Ross, 2004b). Furthermore, the correlations between IT governance and other business activities have been explored as well, for instance, the aspects of mergers and acquisitions (Chin et al., 2004; Lin, 2011), IT capital assessment (Melville et al., 1998; Tsai, 2006), and practical mechanisms (De Haes and Van Grembergen, 2004), and others. Most of these studies were seeking for a direction to align IT resources with business goals. Since IT systems are involved into the business operations in a corporation, many IT system products (e.g. enterprise resource planning (ERP), supply chain management (SCM), customer relationship management (CRM)) are designed specifically to meet various business demands of organizations. Among these products, the enterprise resource planning (ERP) system was proposed by Gartner Group Inc., an IT research and consulting company in United States, in 1990. At that moment, the appearance of the ERP system was a concrete information product that was developed to respond to the firm’s need for integration, and afterward the idea has evolved over a long time from being an interactive platform between IT and business to becoming a general managerial thinking.
1.2. ERP systems as a solution
In 1990, based on the previous conceptions of material requirements planning (MRP) and manufacture resource planning (MRP II), Gartner Group Inc. proposed an idea so-called enterprise resource planning (ERP), which was referring to the integration of information that is generated by the business activities and is provided to the management for operation and decision-making. In the past, IT systems were usually designed to resolve problems from production activities; hence, the systems or mechanisms such as MRP, MRP II and Just-In-Time (JIT) were mainly developed and applied in manufacturing process to improve productivity for the companies. Since 1980s, the customer preference and the market tendency have become more influential to firms on making business strategies; this trend spurred the IT system vendors to start covering more business data related to sales or markets in the system and attempting to generate more meaningful information from a comprehensive perspective for the management (Turban et al., 2000; Waarts et al., 2002). Thus, by now, many ERP vendors (SAP, Oracle, Infor, and others) have published a lot of software packages with the relevant functions to assist enterprises to better use information for their business operation.
In view of the potential advantages of ERP implementations, 10 billion US dollar was
invested in adopting ERP systems by more than 20,000 firms throughout the world in 1997 (Martin, 1998). Regarding the firm size, before 2002, both large and small companies introducing ERP systems account for almost 39% and 60% respectively (Yen et al., 2002).
This difference can be explained that the smaller companies require less adjustments of business process to carry out partial or whole ERP applications than the larger companies do so. When the smaller companies installed ERP systems as important and instant tools for the management while the larger companies were just starting to transfer to ERP solutions in the mid‐1990s (Mabert et al., 2001).
With the development of ERP systems, its core functional areas were implemented or were under the process of introduction by approximately 70% of Fortune 1000 companies during 1990s and 2000s (Cerullo and Cerullo, 2000; Beard and Sumner, 2004, Swanson and Wang, 2005). Likewise, Monk and Wagner (2011) reported that most Fortune 500 companies adopted ERP systems or applications and then reaped strategic benefits. Furthermore, according to the survey of Bingi et al. (1999), the total ERP market was estimated to grow to by 1 trillion US dollar in 2010. Although in the last 10 years, the growth of ERP market has slowed down since those large companies has implemented ERP systems already, the sector of small and mid-size companies becomes the main target to the ERP vendors instead (Monk and Wagner, 2011; Yen et al., 2002). Overall, the ERP system has been characterized as a comprehensive IT system can facilitate the adopting firms to integrate business information distributed in different departments or sites; moreover, by connecting with other enterprise applications, the adopters can reach a larger scale of information integrity within its supply chain over time.
1.3. Reasons for implementing ERP systems
As a part of the globalized market, most companies need IT systems to formulate and organize the internal operational processes when they grow up to a certain scope. From the 1970s onwards, many enterprise systems were used on processing business information by firms that attempt to pursue superior efficiency and performance. In the past, it was not easy for different departments or sites within a firm to share information due to a lot of manual operations and paperwork. Also, entry errors and transcription faults degrade the data quality and cause extra correction cost in the processes. Rizzi and Zamboni (1999) indicated that ERP systems effectively improve the data reliability by reducing redundancy and inconsistency. This feature of integration of ERP systems helps the staff to access proper information that is concurrently and automatically updated from diverse business processes or units (Latamore, 2000). In addition, the studies of both Davenport (2000) and Wah (2000)
implied that a firm could precisely acquire operation information and rapidly respond to the demands of customers through ERP systems, and eventually increase the customer satisfaction. For an enterprise, an ERP system offers a centralized and integrated IT system for all employees from bottom to top, and especially facilitates the strategic decision-making with respect to information collecting and data analyzing for the management (Ross and Vitale, 2000). Furthermore, Lin (2009) suggested that an ERP system is also a tool to improve business processes by reengineering and rearranging the information flow of business activities. The integration after ERP implementations is fulfilled by connecting the discretely existed and widely distributed information among different departments or sites and unifying the data formats and the user interface for the aim of linking all the business activities intensively (Bingi et al., 1999). In that sense, by introducing ERP systems, a company may benefit from reorganizing the internal operational processes, which are result in superior efficiency (Benchmarking Partners, 1999; Davenport, 2000; Hammer and Champy, 2009).
Generally, a firm implement ERP systems for reducing the cost of information handling, for enhancing profitability, for improving efficiency, for integrating information to draw strategies, for raising the customer satisfaction, and for reengineering business process, etcetera. Besides these purposes, some practical reasons and extrinsic realities as follow also motivate a company to adopt ERP systems (Brown, 1997; Davenport, 2000; Skok and Legge, 2002): the replacement for legacy system, issues of conversion to Year 2000, globalized market and e‐commerce, national and international regulations, international standard processes, and the requirements of cooperative partners. In brief, Holland et al. (1999) have categorized the reasons why an organization introducing ERP systems by three dimensions in terms of technical, operational, and strategic purposes. Consequently, in order to respond to the changeable market and obtain globally integrated information, most companies strive to remain their flexibility and competitive advantages by investing in ERP implementations.
1.4. Financial performance and ERP implementations
Originally, ERP systems was viewed as a software package to help a firm to manage its internal information, and in the subsequent years ERP systems were developed to further link with external resources by focusing on integrating the production activities, fund flows, and information processes. This kind of integration has been rapidly extended to apply in management activities after ERP concept was launched for a couple years in 1990s. Scholars began to notice that many companies have introduced ERP systems; soon, they started to pay attention to the influence of ERP implementations on business performance.
The financial performance related to no matter cost cutting or profit creating has become
one of the most concerns. Some positive evidences regarding the market reaction (Hayes et al., 2001; Hunton et al., 2002) and earnings management (Brazel and Dang, 2008) were provided;
yet, some negative or insignificant results were derived from the aspects of cost reduction (Poston and Grabsli, 2001) and return ratios (Hunton et al., 2003). In addition to the financial performance with respect to cost or profit, the efficiency improvement is another expected benefit of ERP systems. Many companies introduce ERP systems to meliorate efficiency while expanding their business over time. Reasonably, a multinational company ordinarily has a better chance to reap more financial interests from the improved efficiency on large scale than so do a domestic company. Also, the externally environmental factors affect ERP implementations. The preparation of pre-implementation and the maintenance of post-implementation both demand for a steady circumstance with the reliable infrastructure, capital sources, technologies, and skilled labors. The given differences of the development in countries provide a foundation to further understand the firms’ financial performance after they implementing ERP systems under different conditions.
Overall, it is sensible to speculate that the financial effect of ERP implementations may emerge in the long-term with the company’s development. Nicolaou (2004a) reported that the necessary time lag of the effect of ERP implementations was at least 2 years. This might partly explain the inconsistent outcomes among the previous studies that were mostly conducted with a three-year time frame of observation on the samples. By extending the time horizon of observation to five years suggested by Knorr (1999) and Wah (2000), this study anticipates to find some remarkable results of the influence of ERP implementations on firm’s financial performance associating with the firm type and country development.
1.5. Research outline
The main goal of this research is to find out the financial effect of ERP implementations with the consideration of firm type and country development in a longer period of observation time. In the first section, introduction presents the background, motivation, and objective of the research. Then, in the second section, the important literature will be reviewed to develop the theoretical insight and research hypotheses of this article. The methodology including sample selection and data collection is described in the third section. The following part, the fourth section, consists of the results of the analyses and the hypotheses. The fifth section will discuss the implications of the results and link back to the literature. The conclusions are provided in the sixth section with the limitations of this study and the suggestions for future research.
2. Literature Review
2.1. General perception of ERP systems – Definition review
With the development of ERP systems over time, it is not merely as a software package but rather a managerial conception. American Production and Inventory Control Society (APICS) has defined the term of ERP in their APICS Dictionary (2010), illustrating that ERP is a “framework for organizing, defining, and standardizing the business processes necessary to effectively plan and control an organization so the organization can use its internal knowledge to seek external advantage.” In addition to the APICS definition, numbers of scholars also agreed that an ERP is an integrated approach engaging in helping a firm to efficiently exploit internal information and external network resources and thus improve the firm performance (Davenport, 1998; Jenson and Johnson, 1999; Mabert, 2000; O’Brien, 2002). Therefore, Akkermans et al. (2003) regarded ERP as a system combining IT and business processes. Furthermore, ERP is the extension of prior MRP and MRP II, and a company harness ERP to improve the allocation of internal resources by its functional modules for processing transactions, and by its ability to manage operation flow and support decision-making.
The main differences between ERP and the past IT systems are the instantaneity and integration on processing information for the purpose of reflecting the utilization of organizational resources that aid strategy formulation (Lee, 2005). Within an ERP system, several functional modules/areas are included, such as finance/accounting, human resources management, manufacturing, sales and service, customer relationship management, etcetera.
And it is flexible for the adopters to implement only few modules for meeting what their business exactly need (Kalakota and Robinson, 2000; Ragowsky and Somers, 2002; Sia et al., 2002). Kale (2000) indicated that the combination of these functional modules could be customized or reconfigured depending on the demands of the adopters. And Norris et al.
(2000) further stated the role of ERP systems in a firm. They described that the different units within an organization are connected by logical transmission of the integrated system, and therefore, the system also facilitate the information sharing. Compared to the prior MRP and MRP II systems, ERP systems are not only a computing system for production, which provides feasible plans of procedures for manufacturing to assist a firm managing the material prudently, but also involve the information on other internal and external operation activities such as finance and sales. Then, all these information will be analyzed by the systems and presented to the users in an arranged way. Thus, for those ERP adopters, the system plays a central role in processing business data by identifying, recording, and forming the information,
and eventually impels the business processes to align with the organizational strategies (Greengard, 2002; Hicks, 1997; McCann, 1998).
By synthesizing these features of ERP, some researchers treated ERP system as a financial accounting oriented system that becomes the linkage between finance and production activities for achieving the major goal of satisfying customers for the company (Faleti, 2001; Heizer and Render, 2010). Moreover, a conception of integrating information is gradually diffusing from the interior to the external network of an enterprise, which is known as the extended ERP (eERP or ERP II). This idea was developed to enhance information integrity by bonding ERP systems to other functional IT systems for seeking more advantages (Lin, 2009). A number of researchers described ERP as a hub or an information process center in a firm while extended ERP including more IT applications or components such as CRM, human resources management, supply chain planning, and sales force automation to grow up the functional scope of the systems for intensifying the collaboration within supply networks (De Brúca et al., 2005; Jaiswal and Kaushik, 2005; Møller, 2005). By and large, ERP has been defined as a financial accounting oriented and cross‐units IT system with the ability of integrating and analyzing the diverse information generated by business operation within an enterprise.
2.2. ERP implementations concerning various factors
As ERP implementations are prevailing in last decades, many studies were accumulated over time to find out its impact on the business operation, and to understand how to better utilize the systems for achieving higher level of performance. Several researchers issued some theoretical frameworks or critical factors to aid the enterprises adopting the ERP systems successfully from the early initial introduction stage (Brakely, 1999; Holland and Light, 1999;
Jenson and Johnson, 1999; Welti, 1999). Each ERP vendor and consulting company also provides practical guidelines to help firms implementing ERP adequately. While some scholars were focusing on the pre-implementation preparation, some other researchers (Nicolaou and Bhattacharya, 2006; Holland and Light, 2001) put their lens on the post-implementation stages because ERP introductions are expected to reveal gains to the adopters over the different periods after the implementations (Nicolaou, 2004b). Moreover, Huang and Palvia (2001) analyzed the issues of ERP technology at a country level and identified diversities among countries. Additionally, organizational culture and internal readiness were also found as important factors that can determine the success of ERP implementations in companies (Gargeya and Brady, 2005).
Therefore, through reviewing considerable studies in the past, the effect of ERP
implementations on a firm is influenced by the internal and external conditions, strategic and tactical factors, organizational and individual abilities, and that increases the complexity in two issues for a company: 1) to make a decision for implementing ERP systems; 2) to evaluate the effect after the completion of the ERP implementation project.
2.3. Inconclusive financial effect of ERP implementations
In order to introduce ERP systems, a company may need to make a great investment in restructuring software and hardware, and programing users training to build up the circumstance for living with the systems (Davenport, 2000). Markus and Tanis (2000) also mentioned that many difficulties of ERP implementations might arise related to operating systems, database management systems, and telecommunications. Therefore, when facing the quite high initial and continuous costs for implementing ERP systems in the organization, it is necessary to know the impact of the ERP adoption on a firm’s financial performance.
Up to the present, the researchers have not given a universal conclusion to the financial effect of ERP implementations. Among the previous studies, financial performance was primarily measured by return ratios, abnormal return of stock, and operating income. On one hand, both Hayes et al. (2001) and Hunton et al. (2002) investigated the market reaction to ERP implementations by listed firms. Their studies provided evidence that suggested a general positive reaction to the announcement of ERP implementations from the capital market. And a company may gain higher financial performance by adopting ERP systems compared to its competitor without ERP implementations (Nicolaou et al., 2003). Similar results regarding the earning management were found by Brazel and Dang (2008). On the other hand, although Poston and Grabsli (2001)’s work implied the initial proofs that ERP implementations may offer positive effect on financial performance over time, they did not show any significant positive influence in the first two years after the implementations.
Likewise, Wieder et al. (2006) indicated that there is no significant difference of firm performance between the adopters and non-adopters of ERP systems. Besides, an interesting result was found by Hunton et al. (2003) who concluded that the significant differences of financial raios between ERP adopters and non-adopters could be explained by the decrease of financial performance in non-adopting firms during the study period. Furthermore, Wier et al.
(2007) found an indirectly positive relationship between the ERP implementation and financial performance. Their work stressed that the use of ERP systems could assist the adopter to yield higher financial performance in both short-term and long-term, while the adopter jointly deploying the non-financial performance incentives. In a word, after ERP was proposed for so many years, previous studies have presented various evidences of the effect
of ERP implementations on the financial performance; however, it seems that the findings are inconclusive and still remain open so far. Thus, one of the main research objectives of this paper is based on the previous literature to investigate the relationship between ERP system implementations and the corporate performance associated with the financial aspect.
While achieving a better integration level for business activities, many multinational corporations (MNCs) with complicated structures and multiple geographical sites are expected to possess more available resources yet have faced bigger challenges on ERP implementations than the domestic corporations (DCs) do (Markus et al., 2000; Olson et al., 2005). The research issued by McKinsey (Benni et al., 2011) suggested that the business-driven approach could deliver the best result of ERP adoptions for a global company.
Since the globalization is an obvious business context in last several decades, there are still little studies trying to explore the difference of financial impact of ERP implementations between DCs and MNCs. In this case, for those ERP adopters, this research tends to put an insight into the comparison of financial performance delivered by ERP implementations between DCs and MNCs.
Additionally, the national specifics add more complexity to ERP implementations and heavily affect the performance of the new systems (Avison and Malaurent, 2007; Shanks et al., 2000; Wang et al., 2006). The organizational issues of ERP implementations in developing and developed countries are discussed by Huang and Palvia (2001). They indicated that the national IT infrastructure can influence ERP implementations on the aspects of the initial invested cost and the follow-up maintenance of the systems. From this point of view, the environment in which the DCs and the MNCs are located, namely the development degree of ERP adopting companies’ home countries and some other relevant factors are also taken into account in this study to analyze the differences.
ERP is chosen since it has been a maturely developed system and has been considered as a crucial IT system widely applied in most companies. Regarding the firm performance, a firm’s financial performance is mainly concerned in this article because the financial and the accounting modules of ERP systems are the major functions (Yang et al., 2006), and every firm that intends to introduce ERP systems has to bear vast cost of the implementations in the initiation. Consequently, by building on the prior studies, this research is attempting to offer different perspectives to understand the correlation between ERP implementations and the financial performance within an organization.
2.4. Hypotheses development
Based on the prior studies, when a company bears such enormous investment and
substantial adjustment required by ERP implementations within an organization, the financial performance would be affected apparently. Thus, in this research, the effect of ERP implementations on financial performance within a company is investigated, and then the results and the previous studies provide a basis for discussing the differences between DCs and MNCs, also between the companies located in developing and developed countries.
Taking the reviews above as a foundation, three hypotheses are proposed in this research.
Firstly, since the researches (Hayes et al., 2001; Hunton et al., 2003; Nicolaou et al., 2003; Nicolaou, 2004b; Poston and Grabsli, 2001) provided diverse arguments on the financial effect of ERP implementations, this article constructs an observation with a longer period (5 years) to capture more financial impact that is expected to be positive in the fourth or fifth year after the implementation is completed. Following the use of performance indicators in the literature (HassabElnaby et al., 2012; Hunton et al., 2003; Nicolaou et al., 2003; Nicolaou, 2004a, 2004b; Nicolaou and Bhattacharya, 2006; Poston and Grabsli, 2001;
Wier et al., 2007), the measures of financial performance in this research concentrated on the ratios stated in section 2.5. Thus, hypothesis 1 is stated as below in order to reexamine the hypotheses from past articles:
Hypothesis 1: ERP implementations contribute positively on financial performance to the adopting corporations.
Secondly, the trend of globalization exists in and impacts on business activities due to the progress of information communication technology and the reduction of transaction cost.
The finding of Bae and Noh (2001) showed that on average the MNCs are more R&D intensive than the DCs. This result infers that in the worldwide market the MNCs may possess more resources and higher capabilities to compete than the DCs do. Also, a major implication is that the MNCs seem to be more willing to invest in the R&D activities, which give more opportunities to them to remain their competitive advantages. Legare (2002) thought that ERP systems could improve efficiency on information connection that is embedded in the firm’s daily operations. The improved efficiency often conduces to cost saving, profit generating, or productivity rising for a firm, especially on large scale. Although the MNCs face more challenges on adopting ERP systems (Markus et al., 2000; Olson et al., 2005), they commonly expect to acquire more gains in the long run than the DCs do because the realized integration by ERP systems on a larger scale may reap more benefits by lowering the systematic risk over time (Michel and Shaked, 1986). Thus, it comes to the hypothesis 2 stated below:
Hypothesis 2: The MNCs benefit more from ERP implementations than DCs do on financial performance.
Finally, country-level factors, e.g. languages, regulations, national cultures, politics, infrastructures and economic environments, can be potent to ERP implementations (Avison and Malaurent, 2007; Huang and Palvia, 2001; Sheu et al., 2003; Sheu et al., 2004). The diverse conditions of the ERP adopters’ home countries imply various operational contexts with uncertainties to the effect of ERP implementations on organizational performance.
Substantially, the developed countries are more able to provide advantageous facilities such as quality infrastructure, sufficient capital, and well-skilled labors to support ERP implementation for the adopting firms than developing countries are able to do so (Huang and Palvia, 2001). Moreover, in contrast to the firms located in developed countries, the IBM report (Yang et al., 2006) indicates the firms in developing countries have a later start on applying ERP systems so that they need more time to be ripe for fully exploiting ERP systems.
In the survey by the report, in developing countries, those firms’ ERP investment account for only 2 percent of their total IT expenses. On the basis of these points of view, thus, hypothesis 3 is formed as below:
Hypothesis 3: The adopting corporations in the developed countries reap better financial performance by the ERP implementations than the adopting corporations in developing countries do.
These 3 hypotheses are examined by the samples of companies located in Asia (mainly focus on Eastern, Southern, and Southeastern Asia) and Europe for three major reasons. One reason is these two regions classically represent the developing and developed countries from the traditional perspective, and this classification approximately meets the Human Development Report by United Nations Development Programme (UNDP, 2013). Another reason is about the differences in growth orientation. The companies located in Asia (especially in China and India) largely benefit from the huge domestic or regional markets in the first decade of 21th century, while European firms were engaging in enhancing the global presence. This phenomenon provides a room for exploring the difference between the DCs and the MNCs after their ERP implementation. The other reason is with regard to the financial crisis occurred in 2008. European countries were commonly impacted more than Asian countries; therefore, it could be interesting to compare the companies’
post-performance of ERP implementation in the regions. Because of these reasons, Asia and Europe are the main research regions in this study.
2.5 Indicators of financial performance
The financial performance is measured by the ratios and figures with respect to the costs, returns, and number of employees reported in annual reports in the observed period. This research focuses on certain financial ratios as the indicators to reflect the trend of financial performance. These indicators, which including selling, general, and administrative expenses (SG&A), cost of goods sold (COGS), return on assets (ROA), return on sales (ROS), return on invested capital/investment (ROI), and asset turnover (ATO), are adopted in the previous researches (Hunton et al., 2003; Nicolaou 2004a; Nicolaou and Bhattacharya, 2006; Poston and Grabsli, 2001). Additionally, the number of employees (NOE) is also taken into account as an indicator to see the effect of the ERP implementation. By and large, ERP implementations are expected to help the adopting companies to save costs, raise return rates, and increase efficiency. The indicators are briefly stated below:
• Selling, general, and administrative expenses (SG&A) – Kieso and Weygandt (2009) explained that the selling expense implies the firm’s effort on making sales, and the expenses of general administration of business operation are recognized as general and administrative expenses. By implementing ERP systems, it is beneficial for the management to collect the accurate, timely, and integrated information that facilitates them to make decision and build up strategy (Trott and Hoecht, 2004). Thus, the ratio of SG&A expenses to total revenues (SG&A/Rev) is reasonably expected to decline after ERP implementations.
• Cost of goods sold (COGS) – Compared to SG&A expenses, cost of goods sold is the direct cost associated with the production activities (Kieso and Weygandt, 2009). With the integration of ERP systems, the information of business activities is expected to connect seamlessly with each other. The improvement of data quality and process trail records in the production can reduce the additional costs for extra correction and monitoring (Rizzi and Zamboni, 1999), and even further decrease the transaction costs by efficient coordination among units with different markets and supply networks (Reimers and Guo, 2012). Thus, the ratio of COGS to total revenues (COGS/Rev) is expected to decrease after ERP implementations.
• Return on assets (ROA) – ROA reveals to what extent a company profitably used the assets on operation in a certain period (Kieso and Weygandt, 2009). It is frequently
applied as a financial performance indicator (Hunton et al., 2003; Nicolaou 2004a;
Nicolaou and Bhattacharya, 2006; HassabElnaby et al., 2012). Thus, ROA is expected to grow up by improved efficiency and profitability after the company employs ERP systems (Brakely, 1999; Stein, 1998; Wah, 2000).
• Return on sales (ROS) – ROS can be regarded as a subordinate ratio to ROA, and is mainly measuring a company’s profitability or profit margin. Since the supposed benefits of ERP systems include cost reduction and profit improvement (Brakely, 1999;
Stein, 1998; Wah, 2000), it is logical to expect an increase of ROS after deploying ERP systems (Hunton et al., 2003).
• Return on invested capital/investment (ROI) – ROI is a similar measure with ROA; it shows how a company exploits its capital/investment for creating profit during a given period. ROI is cited as a key performance indicator in previous researches (Mabert et al., 2000; Nicolaou 2004a; Stein, 1998) and as a check of robustness for the result of ROA analysis (Hunton et al., 2003). In that sense, ROI is expected to rise after ERP transitions.
• Asset turnover (ATO) – ATO can also be treated as another secondary element to ROA, and it represents a firm’s asset efficiency in terms of the sales. Likewise, ATO is expected to be upward with the effect of ERP implementations (Hunton et al., 2003).
• Number of employees (NOE) – The ERP installations is likely to cause business process reengineering or automate a part of manual operations, both of which may indirectly result in the diminishment of number of employees (Arnold et al., 2000;
Nicolaou 2004a; Poston and Grabsli, 2001). Thus, the ratio of number of employees to total revenues (NOE/Rev) after the implementations is expected to be lower than it was before.
These performance indicators are chosen in consideration of the diverse potentially financial effects of the ERP implementation mentioned in the literature. While the first two indicators (SG&A/Rev and COGS/Rev) reflect the cost-related performance, ROA, ROS, ROI, and ATO are referred to the profit-related performance. And the ratio of NOE/Rev is taken to observe the impact of the ERP adoption on the employee since people is one of the main characters in the business processes.
3. Methodology
3.1. Data selection and description 3.1.1 Sampling
The data in this research are those companies that implement ERP systems or applications, they are sampled from LexisNexis Academic database mainly, and from the ERP client lists of the main ERP vendors. The sample methods following previous studies (HassabElnaby et al., 2012; Hayes et al., 2001; Hunton et al., 2003; Poston and Grabsli, 2001), the searching strings in LexisNexis Academic database consist of the key words (e.g.
“implement”, “convert”, “deploy”, “adopt”, “install”, and “introduce” etc.) combined with the names of ERP vendors or products (e.g. SAP R/3, Oracle E-Business, Infor, Baan, JD Edwards, and IFS etc.) to collect the target companies and the their ERP implementation years. Regarding the ERP client list, each target company’s initial ERP implementation year is also traced through the LexisNexis Academic database or firms’ official releases. Then, these selected firms can only be analyzed when their financial information can be found in Datastream database; therefore, the sample companies are confined to listed firms. In order to conduct a longer period of observation (Knorr, 1999), each sample with the financial information at least 5 years before and after the company implementing ERP system is preferred to be analyzed. The 5-year observation window is to compare to the previous researches conducted with only 3-year time frame.
Table 1.1 Sample companies categorized in subgroups
Distribution of 280 companies in each subgroup by firm types and country development.
DC MNC Total
Developing country 74 48 122
Developed country 39 119 158
Total 113 167 280
For further analyses, two dimensions group the selected companies: firm type (namely DCs versus MNCs) and country development (namely developing countries versus developed countries). The profiles of sample companies are acquired from Orbis database. A firm would be classified as an MNC if its percentage of foreign sales to total revenues was reported to be more than 20% (Michel and Shaked, 1986) or if it disclosed any active foreign presences such as subsidiaries, branches, or manufacturing sites (Akhtar and Oliver, 2009) in the period around the implementation year. By referring to prior literature (Huang and Palvia, 2001), certified reports as Human Development Report by United Nations Development Programme
(UNDP, 2013), and The World Bank website (2013), the home country of the sample companies can be categorized into developing and developed countries.
Table 1.2 Sample companies by industry
Distribution of 280 companies in different industries by SIC Code.
First digit of SIC 0 1 2 3 4 5 6 7 8 9 Total
No. of implementation 1 12 50 96 29 27 41 20 4 0 280
Table 1.3 Sample companies by implementation year
Distribution of 280 companies’ implementations in the period of 1995 to 2012 by two dimensions.
Implementation year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
DC 1 3 3 4 1 3 10 12 6 6 5 7 34 5 7 2 4 0 113
MNC 10 9 18 11 14 3 12 14 5 7 9 9 31 9 2 1 2 1 167 No. of
implementation 11 12 21 15 15 6 22 26 11 13 14 16 65 14 9 3 6 1 280 Developing country 2 3 6 6 6 3 9 9 6 7 7 8 33 5 6 1 5 0 122 Developed country 9 9 15 9 9 3 13 17 5 6 7 8 32 9 3 2 1 1 158
In sum, the sample companies are selected from Europe, Oceania and Asia (mainly East Asia, Southeast Asia, and South Asia) with the publicly announced ERP implementation year in the period of 1995 to 2012, which basically covers the duration that ERP systems were widely applied worldwide. To increase the representativeness, the sample companies are collected across industries. As Table 1.1 shown above, 280 firms are sampled in total. The samples comprise of 113 DCs (39 firms located in developing countries and the other 74 firms are from developed countries) and 167 MNCs (including 48 and 119 firms headquartered in developing and developed countries, respectively). Furthermore, Table 1.2 presents the industrial distribution of the sample companies, and all implementations of the 280 companies are displayed in Table 1.3 with years and the dimensions. Accordingly, these tables illustrate that the sample size is quite balanced and helpful to the following analyses for each subgroup (DC/MNC and Developing/Developed).
3.1.2 Descriptive statistics
The distribution of performance indicators is shown in Table 2.1 and Table 2.2. Of 280 sample companies, 31% and 30% choose SAP and Oracle as their ERP vendors, while 11%, 6%, and 3% selected Peoplesoft, Baan, and JD Edwards. Since several mergers and acquisitions took place in the 2000s, SAP and Oracle has become two leading ERP vendors in the world (Panorama consulting solutions, 2013). From this point of view, more than 75% of the sample companies are served by SAP and Oracle. In that decade, Yonyou and Kingdee
became major ERP vendors in China and jointly account for 10% of 280 sample companies.
The rest of the sample companies, around 15%, implemented other ERP vendors’ products or developed the systems in-house.
Table 2.1 Descriptive statistics of performance indicators: DC and MNC
Descriptive statistics values of the performance indicators of sample companies as subgroups DCs/MNCs in the period from one year (P1) before to five years (T1~T5) after the implementation year (ERP0).
P1 ERP0 T1 T2 T3 T4 T5
Country Type DC MNC DC MNC DC MNC DC MNC DC MNC DC MNC DC MNC
Mean SG&A/Rev (%) 12.40% 14.10% 12.27% 14.04% 12.37% 14.20% 13.68% 14.75% 13.55% 14.09% 12.51% 14.15% 14.31% 14.70%
COGS/Rev (%) 57.06% 62.70% 55.77% 63.13% 56.63% 63.26% 56.44% 62.55% 54.72% 63.14% 55.89% 63.62% 56.94% 62.99%
ROA (%) 6.89% 5.80% 6.69% 5.20% 5.13% 5.96% 5.49% 5.98% 6.22% 6.21% 5.94% 5.62% 4.78% 6.32%
ROS (%) 9.71% 8.90% 11.03% 8.65% 6.73% 7.80% 7.10% 7.59% 10.85% 8.58% 11.55% 7.99% 7.94% 7.69%
ROI (%) 11.09% 9.04% 10.73% 7.66% 8.86% 9.49% 8.92% 9.59% 9.66% 9.57% 8.95% 8.66% 7.48% 9.61%
ATO 0.850 0.919 0.821 0.955 0.824 0.954 0.773 0.933 0.786 0.948 0.803 0.957 0.845 0.963 NOE/Rev (%) 1.32% 1.32% 1.17% 1.29% 1.09% 1.66% 1.18% 2.22% 1.03% 1.44% 0.90% 1.44% 0.96% 1.46%
Median SG&/Rev (%) 8.38% 13.81% 8.66% 11.90% 8.22% 12.99% 7.61% 14.20% 7.67% 13.35% 9.56% 13.33% 9.04% 14.05%
COGS/Rev (%) 69.72% 68.37% 67.74% 69.67% 69.83% 69.59% 65.30% 68.86% 64.72% 68.58% 65.56% 69.37% 64.84% 69.03%
ROA (%) 5.84% 5.53% 5.95% 4.76% 5.68% 5.30% 5.19% 4.55% 5.08% 4.50% 4.77% 5.03% 4.26% 4.76%
ROS (%) 9.96% 7.59% 10.64% 6.95% 9.13% 7.27% 8.70% 6.41% 10.79% 6.68% 10.71% 6.54% 8.29% 7.39%
ROI (%) 8.58% 8.20% 9.04% 8.24% 8.89% 8.87% 7.77% 7.80% 7.83% 7.64% 6.90% 8.02% 7.42% 6.87%
ATO 0.690 0.850 0.720 0.890 0.710 0.880 0.730 0.880 0.730 0.850 0.740 0.870 0.783 0.850 NOE/Rev (%) 0.62% 0.52% 0.64% 0.48% 0.58% 0.48% 0.59% 0.45% 0.59% 0.44% 0.57% 0.43% 0.61% 0.39%
St. Dev. SG&A/Rev (%) 19.41% 12.98% 16.42% 12.69% 16.40% 12.57% 19.34% 13.33% 18.53% 12.82% 16.02% 12.12% 24.09% 12.91%
COGS/Rev (%) 34.08% 24.82% 32.58% 25.10% 32.45% 25.41% 35.40% 25.73% 35.10% 25.30% 35.57% 25.14% 32.76% 26.58%
ROA (%) 6.81% 8.34% 6.25% 8.10% 11.20% 7.09% 7.31% 7.59% 6.54% 8.40% 6.63% 10.97% 8.34% 10.15%
ROS (%) 18.39% 10.15% 20.38% 10.76% 42.31% 11.18% 26.29% 10.25% 16.97% 9.08% 19.06% 9.27% 26.36% 10.32%
ROI (%) 11.09% 13.21% 9.54% 14.24% 14.42% 10.73% 11.37% 11.45% 9.68% 11.87% 9.42% 15.15% 11.62% 18.20%
ATO 0.722 0.630 0.653 0.649 0.632 0.647 0.601 0.623 0.605 0.622 0.623 0.631 0.625 0.637 NOE/Rev (%) 1.56% 6.13% 1.24% 6.60% 1.25% 7.79% 1.34% 15.02% 1.05% 6.91% 0.90% 7.20% 1.02% 7.36%
By looking into the descriptive statistics in Table 2.1 and Table 2.2, in terms of the values of mean and median of the sample companies in subgroups preliminarily illustrate a positive effect of ERP systems on financial performance in the period of post-implementation.
However, it is noteworthy to consider that the high values of standard deviation imply that some ERP adopting firms even experience more difficult situations after their implementations of ERP systems. Table 2.1 and Table 2.2 display the descriptive statistics of performance indicators of sample companies in subgroups over the period from one year before (P1), the ERP implementation year (ERP0), to five years after (T1 ~ T5) the implementation. The reported values of SG&A, COGS, and NOE of the total sample companies in the period from P1 to T5 are shown in Appendices.
Table 2.2 Descriptive statistics of performance indicators: Developing and developed countries
Descriptive statistics values of the performance indicators of sample companies as subgroups Developing/Developed (Dvlping/Dvlped) in the period from one year (P1) before to fives years (T1~T5) after the implementation year (ERP0).
P1 ERP0 T1 T2 T3 T4 T5
Country Type Dvlping Dvlped Dvlping Dvlped Dvlping Dvlped Dvlping Dvlped Dvlping Dvlped Dvlping Dvlped Dvlping Dvlped Mean SG&A/Rev (%) 13.40% 13.49% 13.33% 13.39% 13.04% 13.83% 13.44% 15.03% 12.26% 15.15% 12.03% 14.67% 13.60% 15.27%
COGS/Rev (%) 63.29% 58.57% 63.75% 57.75% 64.56% 57.66% 63.89% 57.32% 63.03% 57.51% 63.86% 58.30% 65.44% 57.26%
ROA (%) 7.93% 5.01% 7.32% 4.63% 6.33% 5.13% 7.12% 4.77% 8.31% 4.58% 8.27% 3.80% 7.23% 4.64%
ROS (%) 10.08% 8.58% 9.76% 9.41% 6.12% 8.38% 9.22% 5.98% 11.90% 7.55% 11.36% 7.77% 8.23% 7.44%
ROI (%) 11.83% 8.40% 10.70% 7.48% 10.09% 8.61% 10.92% 8.10% 12.14% 7.61% 12.03% 6.29% 10.08% 7.88%
ATO 0.865 0.913 0.891 0.915 0.887 0.919 0.879 0.866 0.895 0.881 0.929 0.878 0.958 0.892 NOE/Rev (%) 2.51% 0.63% 2.27% 0.56% 2.67% 0.56% 3.60% 0.57% 2.40% 0.51% 2.24% 0.52% 2.38% 0.49%
Median SG&/Rev (%) 8.52% 12.33% 8.35% 11.61% 8.01% 12.61% 6.99% 13.99% 6.97% 13.33% 7.20% 13.89% 8.42% 14.72%
COGS/Rev (%) 72.64% 66.89% 71.95% 66.48% 72.96% 66.82% 71.71% 66.15% 69.95% 66.59% 72.84% 67.16% 72.40% 66.17%
ROA (%) 6.80% 4.58% 6.75% 3.90% 6.15% 4.56% 6.46% 3.89% 6.81% 3.58% 7.01% 3.10% 6.31% 2.86%
ROS (%) 9.63% 7.51% 8.34% 7.80% 8.00% 7.67% 8.21% 6.78% 9.45% 6.68% 9.29% 6.67% 8.56% 7.15%
ROI (%) 8.65% 7.38% 9.32% 7.50% 9.33% 8.27% 8.91% 7.10% 9.60% 6.33% 9.45% 6.22% 9.45% 5.77%
ATO 0.740 0.850 0.755 0.875 0.790 0.860 0.770 0.840 0.780 0.840 0.830 0.860 0.860 0.810 NOE/Rev (%) 1.02% 0.46% 0.99% 0.43% 0.93% 0.44% 0.93% 0.42% 0.85% 0.42% 0.73% 0.41% 0.80% 0.38%
St. Dev. SG&A/Rev (%) 19.33% 12.39% 17.02% 11.63% 16.91% 11.61% 18.69% 13.40% 15.52% 14.98% 15.16% 12.41% 22.73% 13.15%
COGS/Rev (%) 28.14% 29.17% 27.72% 28.62% 27.51% 28.88% 28.58% 30.68% 28.04% 30.71% 28.80% 30.17% 28.11% 29.39%
ROA (%) 8.12% 7.40% 8.77% 6.25% 12.20% 5.21% 8.63% 6.39% 8.20% 7.04% 7.76% 10.55% 9.64% 9.49%
ROS (%) 15.86% 12.25% 20.55% 9.62% 39.98% 11.26% 13.81% 21.04% 12.20% 13.01% 11.97% 15.20% 24.93% 10.33%
ROI (%) 12.75% 12.14% 15.19% 10.57% 16.29% 8.15% 13.29% 9.71% 11.87% 10.12% 11.43% 14.27% 15.94% 16.44%
ATO 0.637 0.686 0.634 0.677 0.612 0.677 0.591 0.650 0.594 0.650 0.640 0.634 0.610 0.662 NOE/Rev (%) 8.09% 0.80% 8.19% 0.62% 9.43% 0.64% 18.29% 0.68% 8.48% 0.53% 8.79% 0.56% 9.06% 0.53%
3.2. Research methods
In this research, both quantitative and qualitative methods are adopted. As mentioned in section 3.1, the financial information of the sample companies is collected with the range of period from 1990 to 2013. These data are analyzed by the parametric and the nonparametric statistical approaches adopted or suggested by the previous literature (HassabElnaby et al., 2012; Hunton et al., 2003; Nicolaou and Bhattacharya, 2006; Poston and Grabsli, 2001; Wier et al., 2007). According to the finding of Barber and Lyon (1996), they suggested that the sample companies should be matched with the control companies by similar pre-event performance. However, ERP systems has been comprehensively applied in most companies in the globe regardless of the industry and the firm size either by purchasing or by self-developing. Under this situation, it is quite difficult to match the ERP adopters with the non-adopters. Thus, the statistical analyses for examining Hypothesis 1 in this research are mainly attempting to explore the financial impact of the ERP implementation on business operation of adopters yet leaves out the comparison with non-adopters. On the other hand, to examine Hypothesis 2 and Hypothesis 3, the selected companies are matched to the
corresponding companies within each subgroup, firm type (DC vs. MNC) and country development (Developing country vs. Developed country). Nonetheless, as a result of the sample limitation, two interviews are conducted in addition to the statistical analyses to obtain more opinions from the experts for understanding the effect of ERP implementations on the organizational financial performance in reality. The interviews are held with a financial specialist who participated in the ERP transition in a global company and with a SAP ERP architect who is experienced in the field more than 20 years. As supplements, some consultancy reports are also quoted in the discussion to reflect the industrial situations. To sum up, Table 3.1 presents an overview of the methodology in this study and the details are deliberated in the coming texts.
Table 3.1 Overview of methodology for each hypothesis in this study
Quantitative methods Qualitative methods
Year-matched comparison
Firm-matched comparison
Interviews Pairwise Entire period Pairwise
H1 Parametric Paird t test RM ANOVA Paird t test Multiple regression
analysis
Consulting
reports review Non-parametric Wilcoxon test Friedman test Wilcoxon test
H2 Parametric Paird t test Paird t test Financial view
Consultant view Non-parametric Wilcoxon test Wilcoxon test
H3 Parametric Paird t test Paird t test Non-parametric Wilcoxon test Wilcoxon test
Note 1: Year-matched comparison means the comparison of the financial performance between before and after implementations.
Note 2: Firm-matched comparison means the comparison of the financial performance between DCs and MNCs, and between companies located in developing and developed countries.
3.2.1. Statistical analyses
In order to find out the financial effect of ERP implementations within a corporation, sample companies’ financial performance are traced for five years before and after their ERP introduction year. For analyses, the parametric approaches performed in this study are paired sample t test and repeated measures ANOVA; the nonparametric approaches include the Wilcoxon signed-rank test and the Friedman test. The multiple regression analysis is also conducted with particular control variables. The first four methods are used to survey whether a significant variation of the financial performance exists among the years after ERP implementations compared to the performance before. The regression analysis is used to further inquire the influence of the other factors that may also affect the financial performance
