Academic journal article Journal of the Association for Information Systems

IT Capabilities, Process-Oriented Dynamic Capabilities, and Firm Financial Performance*

Academic journal article Journal of the Association for Information Systems

IT Capabilities, Process-Oriented Dynamic Capabilities, and Firm Financial Performance*

Article excerpt

Abstract

More and more publications are highlighting the value of IT in affecting business processes. Recognizing firm-level dynamic capabilities as key to improved firm performance, our work examines and empirically tests the influencing relationships among IT capabilities (IT personnel expertise, IT infrastructure flexibility, and IT management capabilities), process-oriented dynamic capabilities, and financial performance. Process-oriented dynamic capabilities are defined as a firm's ability to change (improve, adapt, or reconfigure) a business process better than the competition in terms of integrating activities, reducing cost, and capitalizing on business intelligence/learning. They encompass a broad category of changes in the firm's processes, ranging from continual adjustments and improvements to radical one-time alterations. Although the majority of changes may be incremental, a firm's capacity for timely changes also implies its readiness to execute radical alterations when the need arises. Grounded on the theoretical position, we propose a research model and gather a survey data set through a rigorous process that retains research validity. From the analysis of the survey data, we find an important route of causality, as follows: IT personnel expertise [arrow right] IT management capabilities [arrow right] IT infrastructure flexibility [arrow right] process-oriented dynamic capabilities [arrow right] financial performance. Based on this finding, we discuss the main contributions of our study in terms of the strategic role of IT in enhancing firm performance.

Keywords: IT Capabilities, IT Resources, Process-oriented Dynamic Capabilities, Firm Performance, Resource-based View, IT Business Value

1. Introduction

The relationship between IT and firm performance is a crucial research issue that symbolizes the value of information systems research (Devaraj & Kohli, 2003; Tanriverdi, 2005). Many studies have attempted to understand the role of IT in organizational performance, and more researchers are paying attention to the notion of IT capabilities, including their potential to transform IT resources into business value. Recognizing firm-level, process-oriented dynamic capabilities (PDCs) as key to improved firm performance, this study intends to enhance our knowledge about how IT is tied to business value by offering an integrated view of the relationships among IT capabilities, PDCs, and financial performance.

PDCs are defined as a firm's ability to change (e.g., improve, adapt, adjust, reconfigure, refresh, renew, etc.) a business process better than the competition. We look at firm competence in this area in terms of three key dimensions of business processes: integration/connectivity (e.g., connecting parties for communication and information sharing), cost efficiency, and capitalization of business intelligence/learning (e.g., bringing business analytics and information into the process) (Butler & Murphy, 2008; Fang & Zou, 2009). In fact, dynamic capabilities have been defined as "the ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments" (Teece, Pisano, & Shuen, 1997, p. 517). More recently, Helfat et al. (2007, p. 1) have defined dynamic capabilities as "the capacity of an organization to purposefully create, extend or modify its resource base." They are demonstrated by a firm's ability to recognize changing opportunities in internal and external environments, configuring organizational processes and deploying resources efficiently and promptly to capitalize on them (Eisenhardt & Martin, 2000).

Changes in business processes, ranging from incremental adjustments and improvements to radical reconfigurations and alterations (Ambrosini, Bowman, & Collier, 2009), constitute an important indicator of dynamic capabilities. Whether the enhancement is radical or gradual, it has been recognized that even seemingly minor innovations (e. …

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