Information technology investments and firm value

Our objective in this paper is to develop a firm value model to assist IT managers and researchers in understanding the multiple effects that IT investments have on firm value. This firm value approach adds to the process-oriented approach through simultaneous evaluation of all of the factors that affect firm value. It is crucial for IT professionals to recognize the complex and diverse implications of IT investments on firm value. The implications of the firm value approach include forcing IT managers to think in terms of both industry and company-specific effects of IT investments, to consider both the magnitude and duration of competitive advantage due to IT investments, and the implications of the effect that IT investments have on risk and its relation to firm value. We demonstrate an application of the firm value framework by evaluating a major stream of research in MIS—event studies of IT investment announcements. Appendices to this paper can be found at http://www.itandfirmvalue.com.     

Managing for Better Business-IT Alignment

Business-IT alignment is a complex and multidimensional problem that remains among the top-10 issues for many organizations. IT investment decisions usually fall to CIOs, and often the temptation is to base the decision to buy solely on superior technology. Clearly, organizations can gain a competitive advantage by such investments, but basing them only on the bells and whistles of a particular platform is foolhardy. Any competitive advantage would vanish as soon as the next platform enters the market, and the technological edge that the organization had briefly gained would evaporate. There are four themes in securing B-IT alignment: the role of IT, the business case, IT management intensity, and IT metrics, IT's role is important because not all organizations use IT in the same manner. The next three themes are natural intersections for business and IT investment. The business case is important because it determines how business and IT collaborate to justify the IT investment. The degree of IT management intensity both during and after the actual IT investment determines the organization's commitment to continuous process improvement. Finally, IT metrics are critical to demonstrate to business executives IT investment's value-generating potential     

A process-focused decision framework for analyzing the business value potential of IT investments

A key consideration during investment decision making is the overall business value potential of an information technology (IT) solution. The complexity of the contemporary IT landscape is increasing. As information systems and technologies become more advanced and interconnected, they often impact multiple business processes in the organization. This in turn increases the complexity of IT investment decisions. This paper describes a decision framework for considering investments in information technologies that impact multiple business processes in the organization. The decision framework is illustrated via a case study of a small business that invested in mobile and wireless computing. The microcosm of the small business serves to illustrate some aspects of the business value derived from information technology investments that are often challenging to isolate in more complex organizational environments. The decision framework can support managers to analyze the overall business value returns arising from the ‘ripple effect’ of an IT investment on core and ancillary business processes. In the decision framework, the business value ripple effect is analyzed via a vertical dimension that emanates from core business processes to ancillary processes, and a horizontal dimension that extends over time.

The leveraging influence of strategic alignment on IT investment: An empirical examination

Businesses have invested enormous sums in information technology (IT). The challenge now is to optimize these investments. We empirically examined the influence of the alignment between IS strategy and business strategy (strategic alignment) on the payoff of IT investment. Many studies have been performed on the value of IT investment and strategic alignment separately, in the past, but here we combined them by investigating the moderating affect of strategic alignment on the relationship between IT investment and firm performance for a group of manufacturing firms. The results indicated that there is a synergistic coupling between strategic alignment and IT investment with firm performance. Firms that have aligned IT and business strategies can invest in additional IT resources with some assurance that they will be leveraged substantially. One of our main contributions was in the examination of four differing perspectives of strategic alignment and their relationship with the payoff of IT investment.     

Commodity or competitive advantage? Analysis of the ERP value paradox

A true e-business enabled firm needs the support from a well-tuned enterprise resource planning (ERP) system for providing real time data. However, many companies complain that after their huge investments in ERP systems, they found the ERP systems do not bring them new orders, new profits, or competitive advantage as ERP vendors claim. Academic studies also found mixed results regarding ERP’s payoff. In line with resource based view (RBV), the study proposes an integrated model to shed light on the ERP value paradox. We try to answer “With what organizational resources and by building what firm specific capabilities, the investment in ERP systems may bring firms competitive advantage”. Using a sample of 150 ERP and e-business adopters in the US, we found that (1) organizational resources such as managerial skills and organizational change management play a more important role than IT resources (ERP, e-Business technologies) in generating business integration capability. (2) However, neither IT resources nor organizational resources directly provide firms with competitive advantage. Instead, business integration capability built from the two resources plays a mediating role through which business achieves competitive advantage.     

The synergistic effects of IT-enabled resources on organizational capabilities and firm performance

Computing the value of IT investments and clarifying how the portfolio of IT/IS resources affect a firm's performance and sustainable competitive advantage are critical issues today. We attempted to develop an effective measurement technique and use organizational theory to discover the strategic role of IT-enabled resources in the firm's competitive agenda. Based on a resource-based view of the firm, we proposed a way to evaluate the synergistic effect of such resources on the firm's capabilities, as they, influence the firms’ strategic objectives and improve its financial performance. The technological, human, and organizational resources work together to generate sub-additive cost and super-additive value synergies. Operations, R&D, and marketing capabilities allow firms to implement a business strategy that reflects its customer needs. A survey was conducted to check our framework. Our findings should provide valuable decision guides for practitioners when choosing a portfolio of IT/IS resources for implementing business strategies.     

Valuing information technology infrastructures: a growth options approach

Decisions to invest in information technology (IT) infrastructure are often made based on an assessment of its immediate value to the organization. However, an important source of value comes from the fact that such technologies have the potential to be leveraged in the development of future applications. From a real options perspective, IT infrastructure investments create growth options that can be exercised if and when an organization decides to develop systems to provide new or enhanced IT capabilities. We present an analytical model based on real options that shows the process by which this potential is converted into business value, and discuss middleware as an example technology in this context. We derive managerial implications for the evaluation of IT infrastructure investments, and the main findings are: (1) the flexibility provided by IT infrastructure investment is more valuable when uncertainty is higher; (2) the cost advantage that IT infrastructure investment brings about is amplified by demand volatility for IT-supported products and services; (3) in duopoly competition, the value of IT infrastructure flexibility increases with the level of product or service substitutability; and (4) when demand volatility is high, inter-firm competition has a lower impact on the value of IT infrastructure.     

Information security breaches and IT security investments: Impacts on competitors

In current business climate, a firm’s information systems security is no longer independent from the industry’s broader security environment. A question arises, then, whether stock market values reflect the interdependence of security breaches and investments. In this paper, we used the event study methodology to investigate how a firm’s security breaches and IT security investments influence its competitors. We collected and reviewed 118 information security breaches and 98 IT security investment announcements from 2010 to 2017. We found substantial evidence supporting our hypothesis that information security breaches do, indeed, have a competition effect: when one firm is breached, its competitors have opportunities to absorb market power. For the IT security investment announcements, however, we observed the positive externalities, or contagion effect, in play: market investors feel that the security investments made by one firm increase the security level of the entire network, and hence, competitors also get benefits. Additionally, we found that the competition effect was higher when the breaches occurred after the preceding security investments than when there were no preceding investments before the breaches.     

Information Systems Offshore Outsourcing: An Exploratory Study of Motivations and Risks in Large Spanish Firms

Prior research has documented that IT investment increases market returns. Economic theories predict such returns to be recognized in accounting profitability; this relationship remains ambiguous in prior literature. We reexamine the relationship between IT investment and firm profitability. Our approach is unique in that we examine complementarities between distinct IT components. We document that a firm’s investments in IT components exhibit different impacts on its profitability conditional on the level of investments in complementary components.     

Information technology management: the case of the Port of Singapore Authority

The Port of Singapore Authority (PSA) used information technology (IT) extensively to create a high-tech port that has become the busiest port in the world. Now corporatised as a commercial port operator, PSA Corporation Ltd employs four key management success factors in managing IT to meet the demands and challenges facing port operators. They are: (1) having a business-driven IT investment; (2) aligning business and IT plans; (3) maintaining a flexible and extensible IT infrastructure; and (4) encouraging IT innovation and creativity. These management success factors are discussed and examples are given to illustrate how they help PSA more effectively leverage IT to streamline operations and sustain its competitive advantage.     

Activity-based justification of IT investments

Ever since investments in IT moved from operational to decision support, academics and practitioners have been looking for ways to justify the costs. Traditional approaches, such as NPV, have been shown inadequate in capturing qualitative and quantitative benefits, and techniques developed to address the issue have proved limited in their ability to link investment justification with impact assessment. Recent literature has called for the use of business processes to assess the impact of IT and the same processes can be used to justify investments in IT. The activity-based costing (ABC) approaches in the field of accounting were developed to relate investments to product profitability by allocating the burden to those that receive the most benefit. Thus, this paper uses the ABC approach to relate investments to activities, so that it can be used to justify IT investment. The paper provides a model to determine when the approach, referred to as activity-based justification, is most appropriate and its value is illustrated using a case study.     

Exploring the relationship between information technology investments and firm performance using regression splines analysis

Identifying the business value of information technology (IT) investments has been a major concern of managers and researchers. Various studies have addressed this issue but have provided contradictory results. Here, we explore the relationship between IT investments and firm performance using a relatively new technique, multivariate adaptive regression splines (MARS), and attempt to answer two questions: (1) do investments in IT have a positive impact on organizational productivity? and (2) for a given level of investment, what portion of the total should be invested in IT to maximize organizational productivity? Our results suggest that depending on the conditions that applied, an unbiased observer could either conclude that investments in IT has a positive statistically significant effect on productivity, or that there is a ‘productivity’ paradox. This suggests that the relationship between IT investments and organizational performance is much more complex than that found in some other studies. Our results could also provide guidance to managers who are responsible for determining the allocation of organizational resources.     

Exploring the relationship between information technology investments and firm performance using regression splines analysis

Identifying the business value of information technology (IT) investments has been a major concern of managers and researchers. Various studies have addressed this issue but have provided contradictory results. Here, we explore the relationship between IT investments and firm performance using a relatively new technique, multivariate adaptive regression splines (MARS), and attempt to answer two questions: (1) do investments in IT have a positive impact on organizational productivity? and (2) for a given level of investment, what portion of the total should be invested in IT to maximize organizational productivity? Our results suggest that depending on the conditions that applied, an unbiased observer could either conclude that investments in IT has a positive statistically significant effect on productivity, or that there is a ‘productivity’ paradox. This suggests that the relationship between IT investments and organizational performance is much more complex than that found in some other studies. Our results could also provide guidance to managers who are responsible for determining the allocation of organizational resources.     

A decision support system for evaluating intangible investments

In this research project we have connected the procedural and substantive decision support by means of modern information technology. We have showed how the semistructured strategic decisions concerning intangible investments can be supported effectively by relating appropriate analysis methods to the different phases of the investment process. Because for the intangible investments there is no well-defined solution procedure available, a variety of methods must be integrated to support the solution process.

As a demonstrative example we showed how the intangible investments in logistic systems can be managed. It was highlighted that the logistics systems are complex, cross-functional systems that affect all major functions or departments within the firm beginning from the raw material deliveries and ending with the deliveries of finished goods. Investments in the logistics systems have corporatewide, cross-functional effects, and the investment decisions are strategic decisions. Consequently, the investments in the logistics systems should be strategically justified, not only cost-justified. The cross-functional effects imply that the investment analysis concerning the whole logistics system must be fulfilled under multiple, diversified criteria. We can not, however, ignore the financial, cost and revenue oriented, traditional investment criteria. They just have to be used in a new, flexible way in relation to the goals and objectives of the firm.

Strategic planning is a managerial area where semistructured problems frequently exist. One of the key problems faced in strategic management is the issue of investment decisions. Investments in information systems, logistic systems, flexible production systems, corporate image, etc, are examples of complex investment problems that are difficult to quantify and analyze with traditional techniques. Modern computer technology can enrich the analysis and improve the quality of strategic decision making.     

The strategic value of IT insourcing: An IT-enabled business process perspective

Although research on the business impact of IT outsourcing abounds, little is known about the relative strategic value of IT outsourcing and IT insourcing. Drawing upon the knowledge-based view of the firm, this study postulates that, compared with IT outsourcing, IT insourcing is more effective for developing IT-enabled business processes (IEBP), which subsequently lead to superior firm performance. Our analysis of the data from InformationWeek and Compustat shows that IT insourcing is positively associated with IEBP, while the relationship between IT outsourcing and IEBP is not statistically significant. We also find that IEBP have a significant influence on firm performance. Finally, the effect of IT sourcing mechanisms on IEBP and the effect of IEBP on firm performance are both moderated by the type of innovation related to IEBP. The results suggest that in order to improve their performance firms should consider IT an integral part of their strategic core and should be proactively involved in the internal development of IT resources. We conclude with managerial implications and directions for future research.     

Digital systems and competitive responsiveness: The dynamics of IT business value

The mechanics of competition involve perception and reaction to competitor moves. Both incur delays that can be reduced by digital systems. Using system dynamics and the Red Queen paradigm, we modeled the impact of IT investments on response delays and business value, with the following results: (a) value has significant transient components; (b) value depends on investment level and the relative delays of competitors; and (c) relative delays affect the first-mover advantage. These results show that when assessing the value of IT investments, it is important to consider (a) the temporal pattern of benefits, not just their total magnitude, and (b) the impact of ongoing moves by competitors.     

From IT deployment capabilities to competitive advantage: An exploratory study in China

As more and more companies are deploying, or plan to deploy, information systems, the organizational capabilities to effectively deploy information technologies to support and shape businesses become increasingly important. While many studies have focused on how to acquire state-of-the-art information technologies and on how to effectively utilize implemented information technologies, more studies are still needed to investigate how a company can successfully deploy acquired information technologies to support and shape businesses strategies and value chain activities. IT deployment capabilities are defined as the organizational capabilities to configure and reconfigure a company’s information system by adding new IT components or by adapting the existing information systems in order to make the whole information system available to support and shape businesses. This study identifies and investigates the three building blocks of IT deployment capabilities: strategic IT flexibility, business–IT partnership, and business–IT alignment. Using the resource-based view, we propose a framework to explain the relationship between IT deployment capabilities and competitive advantage. The research model is tested on data collected in China. Results show that strategic IT flexibility and business–IT partnership have direct impacts on competitive advantage, while business–IT alignment has an indirect impact on competitive advantage. The effect of business–IT alignment on competitive advantage is fully mediated by strategic IT flexibility and business–IT partnership. The results provide support for the relationship between IT deployment capabilities and competitive advantage. The study presents implications for how to develop IT deployment capabilities and how to generate business value from IT investment.     

Enterprise application integration: a manager's perspective

To remain competitive, organizations must operate efficiently and be flexible enough to rapidly respond to changing market conditions. To meet the first challenge, IT managers must continually seek ways to support more effective and accurate business processes. The second challenge implies a need for systems that the organization can easily extend to meet new demands. Enterprise application integration (EAI) is a key technology in meeting this mandate. But before implementing a data-integration solution in an enterprise, an organisation should be aware of the technical risks as well as the operations involved in the integration process. This article examines the data-integration subset of EAI. In EAI, data integration is the automated sharing of relevant data between two or more applications. This article aims to provide IT managers with an overview of EAI's fundamental technical issues and solutions.     

Understanding the impact of business cases on IT investment decisions: An analysis of municipal e-government projects

This study synthesizes the extant literature to derive an integrative developmental framework for IT business cases that can be applied to diagnose the feasibility of technological investments. We then construct a theoretical model that postulates the impact of IT business case elements on the initial cost estimates of technological investments. Subsequently, our theoretical model is subjected to empirical validation through content analysis of IT business cases developed for municipal e-government projects. Findings indicate that the richness of the richness of business cases translates to more initial costs being identified in technological investments, thereby conserving resources for the organization through informed investment decisions.     

Joint collaborative planning as a governance mechanism to strengthen the chain of IT value co-creation

Drawing on the relational view of the firm, this paper examines the chain of IT-based co-creation of value and how joint collaborative planning between partners can strengthen this chain. Using data from 51 suppliers in the telecommunication equipment industry, our analysis demonstrates that the greater the partner-specific IT investments made by the firm, the greater its use of supply chain collaborative systems (SCCSs) with those partners and the greater the firm uses SCCSs with partners, the greater its benefits, through the generation of relational rents. Further investigation also shows that partner-specific IT investments is not a predictor of firm benefits and hence confirms the hypothesized chain of IT-based co-creation where IT investments encourage IT use, which in turn creates business value. Finally, our findings also show that joint collaborative planning between partners is an important governance mechanism, anchored on control and trust, that can strengthen the relationship between SCCSs use and firm benefits by impacting the other sources of relational rents tied to the use of SCCSs. This contribution should give academics and practitioners alike a better understanding of how both SCCSs and joint collaborative planning can foster the co-creation of value.