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Article Excerpt
Abstract
Despite the importance to researchers, managers, and policy makers of how information technology (IT) contributes to organizational performance, there is uncertainty and debate about what we know and don't know. A review of the literature reveals that studies examining the association between information technology and organizational performance are divergent in how they conceptualize key constructs and their interrelationships. We develop a model of IT business value based on the resource-based view of the firm that integrates the various strands of research into a single framework. We apply the integrative model to synthesize what is known about IT business value and guide future research by developing propositions and suggesting a research agenda. A principal finding is that IT is valuable, but the extent and dimensions are dependent upon internal and external factors, including complementary organizational resources of the firm and its trading partners, as well as the competitive and macro environment. Our analysis provides a blueprint to guide future research and facilitate knowledge accumulation and creation concerning the organizational performance impacts of information technology.
Keywords: Business value, competitive advantage, cost reduction, country characteristics, economic impacts, efficiency, industry characteristics, information technology, IT business value, IT payoff, macro environment, performance, productivity, resource-based view, trading partners, value
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Introduction
IT business value research examines the organizational performance impacts of information technology. Researchers have adopted myriad approaches to assessing the mechanisms by which IT business value is generated and to estimating its magnitude. Previous research has shown that information technology may indeed contribute to the improvement of organizational performance (Brynjolfsson and Hitt 1996; Kohli and Devaraj 2003; Mukhopadhyay et al. 1995). Moreover, the dimensions and extent of IT business value depend on a variety of factors, including the type of IT, management practices, and organizational structure, as well as the competitive and macro environment (Brynjolfsson et al. 2002; Cooper et al. 2000; Dewan and Kraemer 2000). The research also suggests that firms do not appropriate all of the value they generate from IT; value may be captured by trading partners or competed away and captured by end customers in the form of lower prices and better quality (Bresnahan 1986; Hitt and Brynjolfsson 1996).
By and large, our knowledge has resulted from an organization-centric perspective based on internal business processes, organizational structure, and workplace practices (Bharadwaj 2000; Lichtenberg 1995; Mata et al. 1995). This approach is consistent with computing paradigms that dominated in pre-Internet eras, typically defined by mainframes, minicomputers, and personal computers used primarily for storing and processing information within a single organization. To continue advancing knowledge, however, an expanded conceptualization of IT business value is required.
In the network era, electronic linkages within and among organizations are proliferating, altering the ways in which firms acquire factor inputs, convert them into products and services, and distribute the result to their customers (Hammer 2001; Straub and Watson 2001). This raises new questions about how IT can be applied to improve organizational performance. For example, how do electronically connected trading partners impact a firm's ability to execute IT-based strategies for improved efficiency and competitive advantage? How does the evolving competitive environment shape IT business value? Although emerging studies are beginning to examine pieces of the network-era IT business value puzzle (Chatfield and Yetton 2000; Mukhopadhyay and Kekre 2002), our knowledge remains underdeveloped and unsystematic.
The purpose of this review is to add to knowledge accumulation and creation in the IS academic discipline by summarizing what we know about IT business value and suggesting how we might learn more about what we don't know. Specifically, the objectives of this review are to (1) develop a model of IT business value based in theory and informed by existing IT business value research; (2) use the model to synthesize what is known about IT business value; and (3) guide future research by developing propositions and putting forward a research agenda. The review is unique among other reviews of the IT business value literature in its application of resource-based theory to analyze how IT impacts organizational performance. This approach enables the integration of research assessing both the efficiency implications of IT application as well as its ability to confer a competitive advantage, heretofore separate research conversations. The review is also unique in its extension of the locus of IT business value to the external competitive and macro environment. Another distinction is the inclusion of research studies spanning the entire range of theoretical paradigms and research methods.
There is some ambiguity regarding what constitutes IT business value research, so we begin by introducing terminology and delineating the scope of the research stream. Next, we review theoretical paradigms and modeling approaches employed in prior research. We then develop an integrative model of IT business value using the resource-based view of the firm as a principal theory base. The model provides a basis for structuring our review of accumulated knowledge, for identifying gaps in knowledge, and for developing propositions to guide future research. We conclude by summarizing the findings and limitations of our analysis and by proposing an agenda for future research. (2)
IT Business Value Research: Definition Through Distillation
IT business value scholars are motivated by a desire to understand how and to what extent the application of IT within firms leads to improved organizational performance. Researchers have adopted diverse conceptual, theoretical, and analytic approaches and employed various empirical methodologies at multiple levels of analysis (Brynjolfsson 1993; Brynjolfsson and Yang 1996; Dedrick et al. 2003; Wilson 1995). Moreover, the literature includes contributions from several academic disciplines in addition to information systems, including economics, strategy, accounting, and operations research.
Although our knowledge has been enriched by such diversity, an ancillary consequence has been separate research conversations, hampering cross-pollination of ideas and findings and making it difficult for those working outside the area to understand what we have learned (Chan 2000). We, therefore, lay the foundation for model development by analyzing how IT business value researchers have conceptualized IT and IT business value and by defining the research stream, thereby taking a first step toward unification of this vast and diverse body of accumulated knowledge.
Conceptualizing Information Technology in IT Business Value Research
Information systems scholars have adopted diverse conceptualizations of information technology, extending beyond hardware and software to include a range of contextual factors associated with its application within organizations (Kling 1980; Markus and Robey 1988). As a precise specification of what we mean by IT business value is dependent upon what we mean by IT, we briefly analyze how IT business value researchers have treated the core construct. The result exposes how underlying assumptions about what constitutes IT shape our accumulated knowledge of its organizational performance impacts. Understanding how IT has been conceptualized in prior research also provides a firm foundation from which to derive a systematic and theoretically based definition of information technology within our model derivation.
Five conceptualizations of the IT artifact have been adopted in IS research: (1) tool view, (2) proxy view, (3) ensemble view, (4) computational view, and (5) nominal view (Orlikowski and lacono 2001). In the first conceptualization, IT is viewed as an engineered tool that does what its designers intended, for example, productivity enhancement and reshaping social relations. Such a view is frequently used within IT business value research, i.e., IT is assumed to be a tool whose intended purpose is to generate value (Table 1). In the proxy view, IT is conceptualized by its essential characteristics, which are defined by individual perceptions of its usefulness or value, the diffusion of a particular type of system within a specific context, and its investment or capital stock denominated in financial units. IT business value researchers often adopt this conceptualization in empirical studies using measures such as capital stock denominated in dollars. The ensemble view is the third conceptualization, focusing on the interaction of people and technology in both the development and use of IT. Case studies examining IT business value within specific organizations often adopt the ensemble view (Kraemer et al. 2000; Williams and Frolick 2001). In addition, as quantitative IT business value research has evolved beyond examining the productivity paradox--low aggregate productivity growth during a period of high IT spending--to explore how firms use IT to generate value, researchers have begun to incorporate the role of organizational co-innovations such as workplace practices (Brynjolfsson et al. 2002). As the emphasis of the fourth view is on algorithm and systems development and testing as well as data modeling and simulation, it is less applicable to IT business value research. Finally, studies adopting the nominal view invoke technology in name but not in fact. An example is the derivation of a two-stage game analyzing the impact of IT application on total factor productivity in the context of oligopolistic competition, which introduces IT solely via its posited impact on cost reduction and product differentiation (Belleflamme 2001).
Examining conceptualizations of IT by IT business value researchers reveals that prevailing assumptions have delimited accumulated knowledge in three principal respects. First, IT is frequently operationalized using aggregate variables measured in dollars or counts of systems (proxy view), limiting our understanding of the differential impacts of alternative types of IT as well as the role of usage (Devaraj and Kohli 2003). Furthermore, software is often treated implicitly via assumptive measures or sometimes omitted entirely from the analysis. Given evidence of its association with firm performance (Hitt et al. 2002), there is a need to incorporate software when conceptualizing IT. Second, IT is frequently assumed to lead to an outcome intended by managers (tool view), limiting our understanding of unintended consequences (Markus and Robey 2004). Third, the treatment of the role of IT employees is unsystematic and often excluded from the analysis (ensemble view), hindering our understanding of the role of IT management and technical expertise in generating IT business value. When included, IS employees have been incorporated in an additive fashion with IT stock (Hitt and Brynjolfsson 1996), as a separate construct that is complementary to IT (Black and Lynch 2001; Brynjolfsson et al. 2002), or conceptualized as being inextricably intertwined with IT within business processes (Kraemer et al. 2000). The problem is exacerbated by increasing adoption of networked systems spanning multiple organizations--and hence multiple IS stakeholder groups.
To summarize, IT business value research is characterized by diverse treatment of the IT construct, which has bounded and shaped accumulated knowledge. A systematic explication and definition based on theory is a necessary first step toward knowledge advancement and model building (undertaken shortly). We now turn to the second core construct of the research stream: IT business value.
Defining IT Business Value Research
The term IT business value is commonly used to refer to the organizational performance impacts of IT, including productivity enhancement, profitability improvement, cost reduction, competitive advantage, inventory reduction, and other measures of performance (Devaraj and Kohli 2003; Hitt and Brynjolfsson 1996; Kriebel and Kauffman 1988). For example, Mukhopadhyay et al. (1995, p. 138) refer to the "business value of IT" as the "impact of IT on firm performance." Based on our analysis of the IT business value literature (Appendix A), there is no convention regarding the incorporation of costs of system development and implementation. Moreover, researchers have used the term performance to denote both intermediate process-level measures as well as organizational measures. Emphasizing the salience of this distinction, Barua et al. (1995, p. 7) develop a model incorporating both "first-order effects on operational level variables" such as inventory turnover, as well as "higher level variables" such as market share.
Our analysis also revealed the existence of two formulations of performance: efficiency and effectiveness. The former emphasizes an internal perspective employing such metrics as cost reduction and productivity enhancement in the assessment of a given business process, or "doing things right" (Drucker 1966). In contrast, effectiveness denotes the achievement of organizational objectives in relation to a firm's external environment and may be manifested in the attainment of competitive advantage, i.e., effecting a unique value-creating strategy with respect to competitors (Barney 1991). To emphasize, IT may enable a firm to improve efficiency regardless of whether mimicked by competitors, or may yield performance impacts unique to a particular firm relative to its competitors, i.e., competitive impacts. Synthesizing these observations, we define IT business value as the organizational performance impacts of information technology at both the intermediate process level and the organization-wide level, and comprising both efficiency impacts and competitive impacts.
Several reviews of the literature focus on studies using quantitative empirical methodologies (Brynjolfsson and Yang 1996; Dedrick et al. 2003; Dehning and Richardson 2002). (3) Based on our definition of IT business value, the scope of IT business value research includes conceptual, theoretical, analytic, and empirical studies. Conceptual and theoretical studies apply theory and grounded observation to explicate IT business value (Mata et al. 1995; Porter 2001; Soh and Markus 1995). Analytic studies utilize game theoretic and other modeling techniques to develop models of IT business value whose solutions inform our understanding of the organizational performance implications of alternative IT investment and ownership regimes as well as the role of the competitive environment (Bakos and Nault 1997; Belleflamme 2001; Clemons and Kleindorfer 1992). Finally, empirical studies include qualitative research--case studies and field studies (Clemons and Row 1988; Cooper et al. 2000)--and quantitative studies estimating IT business value at the process, business unit, firm, industry, and country levels of analysis (Alpar and Kim 1990; Dewan and Kraemer 2000; Siegel 1997). Combining these observations, we define IT business value research as any conceptual, theoretical, analytic, or empirical study that examines the organizational performance impacts of IT.
Having demonstrated how prevailing assumptions about the IT artifact in IT business value studies have delimited what we know and defined the research stream, we now turn to the derivation of our integrative model.
Integrative Model of IT Business Value
The organizational application of information technology may improve, reduce, or have no effect on firm performance. Our objective is to develop a descriptive model of the value generating process. The primary theory base is the resource-based view (RBV) of the firm, which combines the rationale of economics with a management perspective. As trading partners and the competitive environment shape the degree to which IT may improve organizational performance, we also appeal to secondary theory bases, including microeconomics and the related industrial organization literature. To motivate the selection of RBV as our primary theory base, we begin by summarizing the theoretical paradigms that have been used in prior studies.
Theoretical Paradigms Used in IT Business Value Research
Researchers have employed several theoretical paradigms in examining the organizational performance impacts of IT, including microeconomics, industrial organization theory, and sociology and socio-political paradigms.
Microeconomic Theory
Microeconomic theory provides a rich set of well-defined constructs interrelated via theoretical models and mathematical specifications. The theory of production has been particularly useful in conceptualizing the process of production and providing empirical specifications enabling estimation of the economic impact of IT (Brynjolfsson and Hitt 1995; Dewan and Min 1997; Lichtenberg 1995). Researchers have also employed growth accounting (Brynjolfsson and Hitt 2003; Jorgenson and Stiroh 1999), consumer theory (Brynjolfsson 1996; Hitt and Brynjolfsson 1996), data envelopment analysis (Lee and Barua 1999), and Tobin's q (Bharadwaj et al. 1999; Brynjolfsson and Yang 1997). To account for the inherent risk and uncertainty of IT investments, option pricing models have been applied to the IT context. Conducting a real-options analysis of point-of-sale (POS) debit services by an electronic banking network, Benaroch and Kauffman (1999, p. 84) describe "the logic of option pricing" as "how it can handle getting the timing right, scaling up or even abandonment, as the organization learns about its business environment with the passage of time." Although the assumptions of microeconomic theory must be carefully assessed within the specific research context, its application within IT business value research has enhanced our understanding of wide-ranging phenomena.
Industrial Organization Theory
IT business value researchers have drawn from the industrial organization literature to examine how firms jointly interact in IT investment decisions and how the resulting benefits are divided. Game theory has been used to examine the role of strategic interaction among competitors in IT business value generation and capture. Belleflamme (2001) constructs a two-stage game of IT investment and production choice under oligopolistic competition. Other researchers have drawn from agency theory and the incomplete contracts literature (Bakos and Nault 1997; Clemons and Kleindorfer 1992). Transaction cost theory has also informed understanding of the role of IT in reducing transaction costs (Clemons and Row 1991b; Gurbaxani and Whang 1991).
Sociology and Socio-Political Perspectives
Although the system rationalism perspective--maximization of organizational efficiency and effectiveness through IT as the common goal of all organizational stakeholders (Kling 1980)--is wide-spread within IT business value research, other perspectives have also informed understanding. Economic activity is embedded in social networks (Granovetter 1985); according to Uzzi (1997, p. 35) "embeddedness is a logic of exchange that promotes economies of time, integrative agreements, Pareto improvements in allocative efficiency, and complex adaptation." IT researchers have applied the theory of embeddedness to inform understanding of how interorganizational relationships impact IT business value in the context of EDI (Chatfield and Yetton 2000). The socio-political perspective has been used to examine the relationship between IT investment and firm performance (Hoogeveen and Oppelland 2002). Kumar et al. (1998) propose a rationality of information systems that stresses relationships and trust within and across organizations and apply it to explain the failure of an interorganizational information system implemented in the textile industry. (4)
The complex problem of linking IT to organizational performance is informed by the insights of multiple theoretical paradigms. However, the absence of a unified theoretical framework has led to a fractured research stream with many simultaneous but non-overlapping conversations (Chan 2000). We thus seek to develop a conceptual model that is not only based in theory, but rooted in one that is inherently suitable for analyzing the complexity of IT and firm performance. Ideally, it would have a robust logical formulation, while enabling study of the rich contextual processes associated with managing IT for business value.
Chosen Theory Base: Resource-Based View of the Firm
The resource-based view of the firm (RBV) emphasizes heterogeneous firm resource endowments as a basis for competitive advantage (Table 2). It is grounded in the seminal work of economists concerned with firm heterogeneity and imperfect competition (Chamberlin 1933; Robinson 1933). These early theorists emphasize the importance of firm heterogeneity--as against market structure--in conferring above normal profits and in driving imperfect competition. In her theory of firm growth, Penrose (1959) refines these ideas by conceptualizing the firm as a bundle of resources within an administrative framework. Evolutionary economists combining Schumpeterian competition with tacit processes and routines further extend thinking away from static equilibrium models of classical microeconomics (Nelson and Winter 1982). A seminal contribution to resource-based theory is provided by Wernerfelt (1984), who proposes the notion of resource position barriers, i.e., barriers to imitation, and links resource attributes to profitability. Subsequent research studies examine how resource attributes lead to competitive advantage (Amit and Schoemaker 1993; Dierickx and Cool 1989; Peteraf 1993) and extend the RBV in various ways, including the analysis of resources in the context of interconnected organizations (Dovev 2002).
In contrast to undifferentiated factor inputs with well-defined property rights, resources are firm-specific, difficult to imitate, and often valuable, i.e., they enable the firm to improve efficiency (Teece et al. 1997). Barney (1991) specifies the conditions required for a resource to confer a competitive advantage. If the valuable resource is rare, i.e., few firms have access to it, it confers a temporary competitive advantage. If it is also...
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