Does IT pay to focus? An analysis of IT business value under single and multi-focused business strategies
Introduction
Despite more than a decade of research into the business value impacts of information technology (IT), executives remain skeptical of whether firms are realizing an adequate return on their IT investment (Carr, 2003, Luftman, 2004). Further complicating the task of IT business value analysis is the fact that as business strategies grow more complex with broad product lines, global operations, and diverse modes of competition, it becomes more difficult to ensure alignment between IT and business strategy (Chan et al., 1997, Palmer and Markus, 2000) and to assess IT business value against goals for IT (Tallon et al., 2000). Facing limited resources and competing strategic priorities, firms have become more selective in their use of IT even as the demands for IT resources have grown (Melville et al., 2004, Wade and Hulland, 2004).
At the same time that firms are struggling to manage the allocation of IT resources and the many applications that has evolved over time, the strategic management literature finds that firms with a single focus underlying their business strategy have higher performance than firms with multi-focused strategies (Dess and Davis, 1984, Robinson and Pearce, 1988, Zahra and Covin, 1993). Porter (1980) refers to firms with multi-focused strategies that combine elements of low-cost leadership, innovation, and niche as stuck in the middle; their lack of focus, indecisiveness, and desire to be all things to all people breeds confusion in the marketplace and leads to mediocre firm performance at best. While this might lead firms to adopt a single focus, as seen in such firms as Ryanair (low-cost leadership), 3M (innovation), and Cartier (niche), the changing nature of competition has forced firms to diversify their strategic risk through multi-focused strategies. Thus, Delta, United, KLM, and Air Canada have created low-cost subsidiaries to target specific routes while Merrill Lynch has added an online, low-cost, self-service division to supplement its range of high-priced investor services. Similarly, Charles Schwab and other discount brokers have acquired private trusts and boutique financial services providers in an attempt to compete directly with their full-service rivals. While the literature might warn against becoming stuck in the middle, as Delta learned in mid 2006 when financial losses forced it to discontinue its nascent low-cost division, uncertainty and competitive rivalries are forcing firms to rethink and broaden their strategies. For many firms, it would seem that being stuck in the middle with multi-focused strategies is no longer an option – it is perhaps a matter of survival.
From an IT perspective, it is logical to ask if the same issues that cause stuck in the middle firms to suffer mediocre performance – channel and pricing conflicts, confused customers – might also translate into weak payoffs from IT. Quite simply, could anecdotal claims that IT is not creating sufficient value be linked to the growing complexity of business strategies? One can say, for example, that IT business value might suffer if firms are forced to allocate a shrinking IT budget across a number of potentially competing strategies. Diverse strategies can mean fewer opportunities for economies of scope and the possibility that some IT projects may be under-funded or shelved for reasons of political expediency (Austin et al., 2005, Dewan et al., 1998). However, it could also be argued that in an era of shared infrastructure, web services, and flexible technologies, more IT business value – not less – might be garnered by firms using multi-focused strategies (Weill et al., 2002). For example, Abercrombie and Fitch have achieved significant value by leveraging a shared IT infrastructure and applications to support their Hollister and sportswear brands.1
In this paper, we use a multi-theoretic lens to argue that, while firms with multi-focused business strategies may be vulnerable to lower firm performance, IT business value at a process and firm-level can, paradoxically, be higher than in firms with a single-focused strategy. As later revealed, data from matched surveys of business and information systems (IS) executives at 241 firms verify that IT business value is, indeed, higher for multi-focused firms. The significance of this result is that if firms must become stuck in the middle in order to cope with uncertainty or competitive expediency that the value created by IT can offset some of the downward pressure on firm performance. Just as we have observed in other areas of the literature that IT can sustain an ineffective hierarchy where a market mechanism may be the preferred contractual form (Malone et al., 1987), IT can sustain stuck in the middle firms as they try to compete. Value can come, for example, from the IT-based coordination mechanisms that allow firms to manage disparate activities. Our contribution to the literature, therefore, is not only to extend our understanding of IT business value but to create insights into how the choices shaping business strategy in today’s world can affect the extent of IT business value.
In the next section, we assess various theories of business strategy to show how IT business value is related to strategic foci. After outlining our primary hypotheses, we review our data and measures. We specifically evaluate IT business value in terms of IT impacts at the process-level, thus providing a more detailed analysis than firm-level measures alone. After presenting our analysis, we discuss our results and their implications for research and practice. Finally, we assess future research opportunities and conclude.
Section snippets
A theory of strategic focus
Chandler (1962) defines business strategy as “the determination of the basic long term goals of an enterprise, and the adoption of courses of action and allocation of resources necessary for carrying out these goals” (p. 13). Over time, several typologies have evolved to denote the myriad strategies that firms have tended to pursue. For instance, Miles and Snow (1978) were among the first to classify strategy into broad headings (prospector, defender, analyzer, and reactor). Later, Porter (1980)
Data collection and analysis
To test these hypotheses, in 2002 we surveyed 1600 firms, randomly drawn from a population of 2826 publicly-traded firms, identified in S&P Compustat as having 2001 sales in the range: $100 million to $3 billion. In order to contain respondent bias, a matched survey methodology was adopted (Podsakoff et al., 2003). First, a senior business executive was chosen to report on perceived measures of IT business value at the process-level; these measures are discussed in detail in the next section.
Discussion
An important question raised by our analysis is why do single-focus firms fare better than multi-focused firms in terms of financial performance metrics (reported in Table 6 and consistent with previous research in the strategic management literature) but yet fail to see significantly higher business value from IT? The resource-based view of the firm offers a theoretical rationale for why this might be.
Conclusion
When we began this research, it was to resolve if differences in strategic foci had an impact on IT business value. In the post-productivity paradox era, as researchers turn to uncovering how, rather than if, IT contributes to firm performance, knowing that strategic choice affects the level and locus of IT impacts within the value chain helps firms to know where IT resources should be located to help in the execution of their business strategy. The strategic management literature has shown on
Acknowledgments
This research has been supported by grants from the CISE/IIS/CSS Division of the US National Science Foundation and the NSF Industry/University Cooperative Research Center (CISE/EEC) to the Center for Research on Information Technology and Organizations (CRITO) at the University of California, Irvine. Industry sponsors include: Boeing, IBM, IDC, Intel, Gartner Consulting, and the US Department of Defense. I am grateful to Martin Curley, Ken Kraemer, Arun Rai (for editorial input), and two
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