1 / 41

Business Strategy and IT-enabled Business Capabilities: Fits, Misfits and Firm Performance

Business Strategy and IT-enabled Business Capabilities: Fits, Misfits and Firm Performance. Abhay Nath Mishra Visiting Assistant Professor David A. Tepper School of Business Carnegie Mellon University Seminar at American University March 24, 2008. Motivation.

marcus
Download Presentation

Business Strategy and IT-enabled Business Capabilities: Fits, Misfits and Firm Performance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Business Strategy and IT-enabled Business Capabilities: Fits, Misfits and Firm Performance Abhay Nath Mishra Visiting Assistant Professor David A. Tepper School of Business Carnegie Mellon University Seminar at American University March 24, 2008

  2. Motivation • IT is the largest single component of capital investment in the US. • Businesses worldwide spend more than $2 trillion on IT every year. • Are organizations making their IT investment decisions judiciously? • Are these investments likely to impact firm performance? Business Strategy and IT-enabled Business Capabilities

  3. Motivation • “IT Doesn’t Matter.” (Carr 2003) • Generic IT may not matter, but firm-specific IT capabilities do (Barua et al. 2004, Bhardwaj 2000, Gurbaxani 2003). • Only when IT investments are converted into IT capabilities and put to use that they add value (Soh and Markus 1995, Zhu and Kraemer 2005) • Are firms making IT investments on capabilities that are likely to have the highest impact on their performance? Business Strategy and IT-enabled Business Capabilities

  4. IT Capabilities • The importance of IT capabilities widely acknowledged • Implicit assumptions in the literature: • “More” is better (Bhatt and Grover 2005, Bhardwaj 2000) • “All” IT capabilities are important (Bhatt and Grover 2005) • The significance of firm strategy in IT capability development and deployment Business Strategy and IT-enabled Business Capabilities

  5. Research Questions • Are the requirements for IT capabilities likely to vary systematically among firms following different business strategies? • How should firms determine the right level of IT investment in various IT capabilities? • Does the “fit” between the business strategies followed by a firm and its IT capabilities impact performance? Business Strategy and IT-enabled Business Capabilities

  6. Empirical Observations • Different flavors of strategy and IT capabilities • Wal-mart • Kmart • Zara Business Strategy and IT-enabled Business Capabilities

  7. Research Model • Business Strategy • Prospector • Analyzer with Innovation • Analyzer without Innovation • Differentiated Defender • Low-cost Defender Firm Performance FIT • Business-oriented IT Capabilities • Entrepreneurial • Operational • Renewal • Customer • Vendor • Competitor • Visioning • Relational Business Strategy and IT-enabled Business Capabilities

  8. Business Strategy Archetypes • The Miles and Snow (1978) typology • Prospector, Analyzer, Defender and Reactor • Extensions to the Miles and Snow typology • Prospector, Analyzer with Innovation, Analyzer without Innovation, Low Cost Defender and Differentiated Defender • The need for extension: more nuanced strategies observed in contemporary firms (Ruekert and Walker 1987, Burton and Obel 1998, DeSarbo et al. 2005) Business Strategy and IT-enabled Business Capabilities

  9. IT Capabilities • Capabilities: “embedded” “routinized” “processes” that reflect “a firm’s ability to perform repeatedly a productive task which relates either directly or indirectly to a firm’s capacity for creating value” (Grant 1996). • IT Capabilities: the broad ability of firms to develop, diffuse, apply, and manage IT effectively to achieve firm objectives. • The focus in this study: business-orientedITcapabilities Business Strategy and IT-enabled Business Capabilities

  10. The Classification of IT Capabilities (1) • Process-integration capabilities • Entrepreneurial IT capabilities (ENT) • Operational IT capabilities (OPR) • Renewal IT capabilities (REN) Business Strategy and IT-enabled Business Capabilities

  11. The Classification of IT Capabilities (2) • Market orientation capabilities • Customer orientated IT capabilities (CUS) • Vendor orientated IT capabilities (VEN) • Competitor orientated IT capabilities (COM) Business Strategy and IT-enabled Business Capabilities

  12. The Classification of IT Capabilities (3) • Strategy and IT vision alignment capabilities • Business and IT visioning capabilities (VIS) • Business and IT relational capabilities (REL) Business Strategy and IT-enabled Business Capabilities

  13. Attributes for the Creation of Strategy Profiles • Based upon and an extension of Venkatraman’s (1989) STROBE instrument • Retain the five dimensions used in STROBE • Proactiveness (PR), Aggressiveness (AG), Risk orientation (RO), Analysis (AN) and Futurity (FT) • Disaggregate the defensiveness dimension • Cost reduction (CR) and Close alliances (CA) • Introduce a new dimension • Innovativeness (IN) Business Strategy and IT-enabled Business Capabilities

  14. Theoretical Underpinning: Configurational Theory • Basic tenets of Configurational theory • Organizational configurations are multidimensional constellation of distinct attributes that commonly occur together (Ketchen et al. 1993, Sabherwal and Chan 2001) • Configurational approach takes a step beyond the contingency approach by adopting a holistic stand • The identification of ideal profile types is central to the configurational theory • The closer a firm is to an ideal profile type and the better is the fit between different attributes, the better is firm performance (Doty et al. 1993, Meyer et al. 1993) • The concept of equifinality (Drazin and Van de Ven 1985) Business Strategy and IT-enabled Business Capabilities

  15. Inductive and Deductive Approaches to Configuration Analysis • Inductive approach • Uses multivariate data analysis techniques to uncover patterns for top performing firms • These patterns are chosen as ideal profile types • Deductive approach • Uses theoretical perspectives to define ideal profile types and hypothesizes the relationship between configurations and performance • The extant literature has used the inductive approach predominantly Business Strategy and IT-enabled Business Capabilities

  16. The Strategy Typology -1: Low; 0: Medium; 1:High Business Strategy and IT-enabled Business Capabilities

  17. Ideal IT Capability Profiles of Strategy Archetypes -1: Low; 0: Medium; 1:High Business Strategy and IT-enabled Business Capabilities

  18. Research Model • Business Strategy • Prospector • Analyzer with Innovation • Analyzer without Innovation • Differentiated Defender • Low-cost Defender Firm Performance FIT • Business-oriented IT Capabilities • Entrepreneurial • Operational • Renewal • Customer • Vendor • Competitor • Visioning • Relational Control Variables: Firm size, industry, diversification, other variables Business Strategy and IT-enabled Business Capabilities

  19. Hypotheses • The equifinality hypothesis (Drazin and Van de Ven 1985, Miles and Snow 1978) • H1: Firms classified as Prospectors, Analyzers with Innovation, Analyzers without Innovation, Differentiated Defenders, and Low Cost Defenders perform equally well. Business Strategy and IT-enabled Business Capabilities

  20. Hypotheses • The strategic fit hypothesis (Venkatraman 1989, Sabherwal and Chan 2001, Vorhies and Morgan 2005) • H2: The greater the fit between a firm’s realized business strategy profile and that of its corresponding ideal type, the better its performance. Business Strategy and IT-enabled Business Capabilities

  21. Hypotheses • The IT capability fit hypothesis • H3: The greater the fit between a firm’s realized business-oriented IT capability profile and the theoretically determined ideal profile for business-oriented IT capabilities corresponding to its strategy archetype, the better its performance. Business Strategy and IT-enabled Business Capabilities

  22. Hypotheses • The IT capability fit hypotheses • H4:The greater the fit between a firm’s realized business-oriented IT capability profile and the empirically derived ideal profile for business-oriented IT capabilities corresponding to its strategy archetype, the better its performance. Business Strategy and IT-enabled Business Capabilities

  23. Hypotheses • The total fit hypotheses • H5a:The greater the total fit of a firm’s strategy profile and its business-oriented IT capability profile with its theoretically determined ideal archetype, the better its performance. • H5b: The greater the total fit of a firm’s strategy profile and its business-oriented IT capability profile with its empirically derived ideal archetype, the better its performance. Business Strategy and IT-enabled Business Capabilities

  24. Data • Survey data from 2000 largest firms in the US • Surveys answered by a top business manager • 13 industries represented in the sample • Both public and private firms represented in the sample • Performance data obtained from secondary sources Business Strategy and IT-enabled Business Capabilities

  25. Data Issues • Response rate = 3.35% • Reasons for low response rate • Long questionnaire • Involved questions • Sample profile over-surveyed • Final sample size = 67 • See Rajagopalan (1997), Droge et al. (2004) and Anderson et al. (1994) Business Strategy and IT-enabled Business Capabilities

  26. Non-response Bias : Across Different Sampling Rounds Business Strategy and IT-enabled Business Capabilities

  27. Non-response Bias : Respondents and Non-respondents Business Strategy and IT-enabled Business Capabilities

  28. Sanity Checks on the Data • Adequate reliability and validity • PCA: items loaded as expected • Variance extracted estimate >0.5 for every construct Business Strategy and IT-enabled Business Capabilities

  29. Data Analysis: Determination of Ideal Profile Types • Step 1: Cluster analysis to uncover strategy configurations - Two-step approach (Punj and Stewart 1983) • Hierarchical clustering using Ward’s algorithm • Two stopping rules – Calinski and Harabasz pseudo-F index and Duda Hart rule • Partitional clustering using K-means algorithm • Use centroid values from hierarchical clustering as seeds in the iterative K-means algorithm • Distance measures • Euclidean distance (√ ∑ (xi – yi)2) • Manhattan or city block distance (∑ |(xi – yi)|) • Chebychev distance Max(xi – yi) • Power distance (∑ |(xi – yi)|p)1/r Business Strategy and IT-enabled Business Capabilities

  30. Data Analysis: Classification of Firms into Ideal Profile Types • Step 2: assessing deviation from ideal strategy profiles • Deviation = √ ∑ (xsj – Xij)2 • xsj = the mean score for cluster s in the study sample on the jth strategy dimension (j = 1 to 8), and Xij = the score for the ideal profile for strategy archetype i (i= 1 to 5) on the jth strategy dimension Business Strategy and IT-enabled Business Capabilities

  31. Data Analysis: Calculation of Strategy and IT Capability Fit/Misfit • Step 3: Calculating strategy profile deviations from the theoretical ideal profiles • Deviation = √ ∑ (xsj – Xij)2 • where xsj = the score for a firm s within cluster i on the jth strategy dimension, and Xij = the theoretically determined score on the jth strategy dimension for the strategy archetype that cluster i is classified as • Step 4: Calculating IT capability profile deviations from the theoretical/empirical ideal profiles • Deviation = √ ∑ (xsj – Xij)2 • where xsj = the score for a firm s within cluster i on the jth IT capability dimension, and Xij = the theoretically/empirically determined score on the jth IT capability dimension for the strategy archetype that cluster i represents Business Strategy and IT-enabled Business Capabilities

  32. Data Analysis • Step 4: Regression Analysis • Regress performance on strategy deviation, capability deviation, sum of strategy capability deviations and control variables • Assumptions regarding normality of residuals, multicollinearity and homoscedasticity of error terms not violated Business Strategy and IT-enabled Business Capabilities

  33. Regression Analysis: Controls • Firm size (# employees) • Lagged sales • Number of industries count • Age • Industry size • Industry competition (# of other firms in the 4-digit SIC segment) • Industry concentration (C8, C4, C20, C50) Business Strategy and IT-enabled Business Capabilities

  34. Results • Equifinality hypothesis tested by ANOVA ((F4,59) =0.56; p=0.70)) • The fit hypotheses are tested by OLS results Business Strategy and IT-enabled Business Capabilities

  35. OLS Results

  36. Robustness Checks • Three sets of models estimated • Across strategy top 1 overall performer • Across strategy top 5 overall performers • 5 random performers • Deviations from non-ideal calibration profiles do not impact performance significantly • Provides a power analysis for hypothesis testing Business Strategy and IT-enabled Business Capabilities

  37. Limitations • Modest sample size • Cross sectional data • Dimensions of strategy and IT capability weighed equally • Lack of generalizability Business Strategy and IT-enabled Business Capabilities

  38. Theoretical Contributions • Conceptualization of a key and multi-dimensional set of IT capabilities to support business strategies • Demonstration of the nuanced alignment of business strategy and IT capabilities • Examination of the alignment between business needs with business capabilities fostered by IT • Extension of Venkatraman’s STROBE instrument • Development and empirical validation of the extended Miles and Davis typology • The use of both deductive and inductive approaches to study profile deviations Business Strategy and IT-enabled Business Capabilities

  39. Managerial Implications • The development and deployment of IT capabilities and IT investments should be contingent upon the business strategy • Select a few critical areas and invest in IT selectively to build capabilities • Focus on the profile of the strategy leader and not the industry leader; benchmark IT capabilities accordingly • Pay close attention to IT capabilities at the disaggregated level Business Strategy and IT-enabled Business Capabilities

  40. Future Research in IT Strategy • Complementarity and substitutability of IT resources, capabilities and investments • Do certain IT resources, capabilities and investments provide higher benefits in association with other resources, capabilities and investments? How and why? • Can certain IT resources, capabilities and investments substitute for other resources, capabilities and investments? How and why? Business Strategy and IT-enabled Business Capabilities

  41. Thanks!!

More Related