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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

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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
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

motivation3
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

it capabilities
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

research questions
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

empirical observations
Empirical Observations
  • Different flavors of strategy and IT capabilities
    • Wal-mart
    • Kmart
    • Zara

Business Strategy and IT-enabled Business Capabilities

research model
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

business strategy archetypes
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

it capabilities9
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

the classification of it capabilities 1
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

the classification of it capabilities 2
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

the classification of it capabilities 3
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

attributes for the creation of strategy profiles
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

theoretical underpinning configurational theory
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

inductive and deductive approaches to configuration analysis
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

the strategy typology
The Strategy Typology

-1: Low; 0: Medium; 1:High

Business Strategy and IT-enabled Business Capabilities

ideal it capability profiles of strategy archetypes
Ideal IT Capability Profiles of Strategy Archetypes

-1: Low; 0: Medium; 1:High

Business Strategy and IT-enabled Business Capabilities

research model18
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

hypotheses
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

hypotheses20
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

hypotheses21
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

hypotheses22
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

hypotheses23
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

slide24
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

data issues
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

non response bias across different sampling rounds
Non-response Bias : Across Different Sampling Rounds

Business Strategy and IT-enabled Business Capabilities

non response bias respondents and non respondents
Non-response Bias : Respondents and Non-respondents

Business Strategy and IT-enabled Business Capabilities

sanity checks on the data
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

data analysis determination of ideal profile types
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

data analysis classification of firms into ideal profile types
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

data analysis calculation of strategy and it capability fit misfit
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

data analysis
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

regression analysis controls
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

results
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

robustness checks
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

limitations
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

theoretical contributions
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

managerial implications
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

future research in it strategy
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