...paper is to broaden understanding about the strategic role of IT by examining the nomological network of influences through which IT impacts firm performance. By drawing upon recent thinking in the strategy, entrepreneurship, and IT management literatures, this paper uses multitheoretic lens to argue that information technology investments and capabilities influence firm performance through three significant organizational capabilities (agility, digital options, and entrepreneurial alertness) and strategic processes (capability-building, entrepreneurial action, and coevolutionary adaptation). We also propose that these dynamic capabilities and strategic processes impact the ability of firms to launch many and varied competitive actio ns and that, in turn, these competitive actions are a significant antecedent of firm performance. Through our theorizing, we draw attention to a significant and refrained role of IT as a digital options generator in contemporary firms.

Keywords: IT competence, strategic agility, digital options, process capital, knowledge capital

ISRL Categories: AF0401.02, DA06, DA07, DDO6, EF07, UF, E10225

Introduction

As contemporary firms face intense rivalry, globalization, and time-to-market pressures, agility, or the ability to detect and seize market opportunities with speed and surprise, is considered to be an imperative for business success (Brown and Eisenhardt 1997; Christensen 1997; D'Aveni 1994; Goldman et al. 1995). Agile firms continually sense opportunities for competitive action in their product-market spaces and marshal the necessary knowledge and assets for seizing those opportunities. Agility underlies firms' success in continually enhancing and redefining their value creation, capture, and competitive performance through innovations in products, services, channels, and market segmentation.

The convergence of computing, communications, and content technologies offers firms significant opportunities for enhancing agility (Goldman et al. 1995; Moore 2000; Venkatraman and Henderson 1998). Contemporary firms are making significant investments in information technologies (such as Web services, data warehousing, customer relationship management, or supply chain management technologies) to leverage the functionalities of these technologies in shaping their business strategies, customer relationships, and extended enterprise networks. In particular, the disruptive forces of digitization, unbundling of information and physical value chains, and disaggregation of organizational infrastructures for customer relationship, manufacturing, procurement, and supply chain fulfillment have heightened the significance of IT in enabling agile competitive moves (Hagel and Singer 1999; Rayport and Sviokla 1995).

As IT emerges as a strategic differentiator, there is greater interest in understanding how IT assets and resources influence superior firm performance. Although prior research has demonstrated that IT investments do have beneficial performance and productivity impacts (for example, Bharadwaj et al. 1999; Hitt and Brynjolfsson 1996), theoretical frameworks are yet to explain how and why these investments enhance firm performance. Similarly, although researchers have examined the performance benefits of IT-related capabilities (Bharadwaj 2000; Bharadwaj et al. 2001; Mata et al. 1995), further attention is needed to understand how and why these capabilities shape firm performance.

The purpose of this paper is to broaden understanding about the strategic role of IT by examining the nomological network of influences through which IT impacts firm performance. In particular, as illustrated in Figure 1, we argue that information technology investments and capabilities influence firm performance through a nomological network of three significant organizational capabilities (agility, digital options, and entrepreneurial alertness) and strategic processes (capability-building, entrepreneurial action, and coevolutionary adaptation). We also propose that these dynamic capabilities and strategic processes impact the quality of competitive actions by firms and that, in turn, these competitive actions are a significant antecedent of firm performance (i.e., competitive actions mediate the links to firm performance). Through our theorizing, we draw attention to a significant and refrained role of IT as a digital options generator in contemporary firms.

The rest of the paper is structured as follows. First, we explore the theoretical underpinnings of our model. Second, we develop our model and propositions. Finally, we close with a discussion of the theoretical and practical contributions of the paper.

Theoretical Underpinnings

Three distinct, but increasingly converging, streams of literature frame our proposed conceptualization. First, the strategic management literature offers insights about the resources, capabilities, and processes shaping firms' competitive conduct. Next, the entrepreneurship literature offers insights about the processes associated with agility and competitive actions in firms. Finally, the IT management literature contributes ideas about the role of IT in influencing agility. Relevant ideas from these three streams are briefly highlighted in the following sections.

The Logic of Strategy: Factors Affecting Firm Performance

As shown in Table 1, three distinct logics describe the role of strategy in shaping superior firm performance. First, the logic of positioning emphasizes that superior firm performance is the consequence of a firm's strategic position and the degree to which it executes those positions through an integrated system of activities. Positions establish the uniqueness and value of the firms' products or services and the activity systems reinforce how well it executes its positions to reap economic rents (Porter 1980,1996, 2001). Integrated activity systems represent commitments to a specific position. On one hand, they lock-out rivals from mimicking that position; but at the same time, they lock-in the firm to the chosen position and constrain its strategic mobility (Ghemawat 1991). Much of the early IT strategy literature embraced the positioning logic by emphasizing the role of IT in activities such as pricing (Beath and Ives 1986) and customer relationship management (Benjamin et al. 1984; Ives and Learmonth 19 84; Porter and Millar 1985). However, this logic does not explain how firms construct inimitable activity systems (Sambamurthy 2000) and how strategic conduct occurs in dynamic, disequilibrating, or discontinuous business environments where the sustainability of fixed positions might be untenable (Jacobson 1992).

The logic of leverage argues that firm performance is shaped by the deployment and use of idiosyncratic, valuable, and inimitable resources and capabilities that might be heterogeneously distributed across firms (Barney 1991). Firms leverage two distinct mechanisms in the form of resource-picking and capability-building (Makadok 2001). Resource-picking mechanisms create economic rents when firms apply superior information and knowledge in procuring resources cheaper than their marginal productivity when used in combination with other resources (Barney 1986).

However, it is not clear whether the mere procurement and possession of resource bundles is adequate for supernormal performance, especially when most firms may have access to similar factor markets. In contrast, capability-building leverage refers to firms' ability to integrate, build, and reconfigure internal and external resources in creating the higher-order capabilities that are embedded in their social, structural, and cultural context (Grant 1995; Teece et al. 1997). The embeddedness of these capabilities makes them comparatively more valuable and inimitable. Capability-building mechanisms have also been termed as dynamic capabilities: the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die" (Eisenhardt and Martin 2000, p. 1107). Although the logic of leverage explains strategic conduct in stable to moderately dynamic markets, its relevance has been questioned in explaining strategic conduct in fast-paced business e nvironments. In these latter environments, long-term competitive advantage is rarely achieved. Firms must compete by seizing a series of short-term advantages through many competitive actions (D'Aveni 1994; Smith et al. 1992). Therefore, there is a need for understanding how firms engage in rapid and relentless innovation for seizing market opportunities (Brown and Eisenhardt 1997; D'Aveni 1994; Eisenhardt 1989).

The logic of opportunity argues that superior firm is shaped through relentless innovation and competitive actions (D'Aveni 1994; Lengnick-Hall and Wolff 1999; Young et al. 1996). Rooted in the Schumpeterian dynamics of disequilibrium and market disruption (Schumpeter 1934,1950), this logic suggests that competitive advantages built through positioning or leverage could be eroded because: (1) rivals or new entrants can generate superior knowledge about the market, or insights about creative resource configurations, and launch moves to disrupt the incumbents' current advantage, and (2) technological, socioeconomic, or cultural shifts may uncover new market opportunities that threaten current advantages. Therefore, continuous innovations in products, services, or channels and vigilance to emerging opportunities or countervailing threats are vital for superior performance.

Eisenhardt and Brown (1999; also Eisenhardt and Galunic 2000; Eisenhardt and Sull 2001) suggest that the logic of opportunity draws attention to coevolution as a strategic process, whereby firms routinely change "the web of collaborative links--everything from information exchanges to shared assets to multibusiness strategies--among businesses" (Eisenhardt and Galunic 2000, p. 91-92)." Coevolution implies flexibility in the line-up of assets, capabilities, and knowledge that a firm can assemble in order to detect the windows of opportunity in the marketplace and capture positions of advantage. The dynamics of coevolution also imply an iterative loop among assets, capabilities, and knowledge: experience with seizing or losing positions begets new assets, capabilities, and knowledge, which in turn, positions the firm toward better detection and exploitation of future opportunities (Helfat and Raubitschek 2000). The logic of opportunity also suggests that strategy relies upon

surveillance, interpretation, initiative, opportunism, and shaping situations as they develop. Success requires improvisation, reconnaissance, and the ability to act quickly and decisively (LengnickHall and Wolff 1999, p. 1113).

Two insights emerge from our review of the strategic management literature. First, our interest is in dynamic capabilities that permit firms to flexibly combine different IT and business resources and stimulate competitive actions through innovations in products, services, and channels. Second, strategic processes provide an insight into how firms improvise combinations of knowledge, assets, and resources in crafting competitive actions.

Further, our theory's boundary condition is firms operating in moderate to rapidly changing business environments, such as the high-tech, retailing, and financial services sectors. D'Aveni (1994) describes this competition as having three important characteristics. First, competitive advantage is short lived because firms continually launch competitive actions to disrupt their rivals' positions and wrest economic rents. Second, firms must undertake a series of actions to continuously recreate competitive advantage. Third, firms with a greater number and variety of new competitive actions will seize greater advantages. These characteristics are prevalent in contemporary industries that have been subjected to the disruptive force of digitization. This also implies that strategy must embrace the logic of opportunity and be targeted at seizing series of competitive advantages. Of course, this view does not imply that firms can easily alter their positions or resources (Porter 1996, 2001). Path dependencies limit the range of strategic alternatives for firms even as they embrace the logic of opportunity (Teece et al. 1997). Furthermore, firms may become complacent and strategically simple over time, as their managers narrow the range of actions to only those that have worked well in the past(Ferrier et al. 1999; Miller and Chen 1996).

Entrepreneurial Action: The Discovery of Strategic Opportunities

Entrepreneurial action refers to behaviors through which firms recognize and exploit market opportunities through novelty in resources, customers, markets, or combinations of resources, customers, and markets (Smith and DeGregorio 2001). Traditional models of competition assume that all firms possess perfect and complete knowledge about their markets. However, literature rooted in the Austrian school of economic theory acknowledges that firms might possess imperfect knowledge and information about their markets and customers (Grimm and Smith 1997). Hayek (1949) conceptualized the environment as consisting of varying levels of information on what might be the best product features and the prices that sellers can offer and that buyers are willing to pay. Firms differ in their knowledge about appropriate products, customer preferences, locations where customers will be found, and the type of channels that they will prefer. Incumbent firms have their own cognitive maps, whereas new entrants or rivals can develop competing cognitive maps that capitalize upon the incumbents' blind spots. Kirzner (1973) suggests that firms are often ignorant of the real market opportunities available to them. When some firms pass up opportunities due to market ignorance, others that spot and exploit those opportunities can avail of the scope for entrepreneurial action. Thus, entrepreneurial action...

NOTE: All illustrations and photos have been removed from this article.



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