N. Denić i dr.
Upravljanja rizicima projekta informacijskih sustava
ISSN 1330-3651 (Print), ISSN 1848-6339 (Online)
UDC/UDK 658.51.001.3:004.451
RISK MANAGEMENT IN INFORMATION SYSTEM PROJECTS
Nebojša Denić, Vidoje Moračanin, Momir Milić, Zoran Nešić
Original scientific paper
This paper presents a studious overview of key project success factors in the implementation of information system to business systems. The paper
presents the results of theoretical and practical studies, which have shown that the process of managing development of information system projects holds
many problems and uncertainties in practice, which despite many improvements in the area of development methods, techniques and tools are still facing
some problems and difficulties in the process of implementation of integrated information systems. Managing ERP implementation projects is associated
with different specific problems, which are essentially different from the traditional information system developments, because they contain the strategic,
tactical, organizational and business environment factors.
Keywords: ERP, information system, project management
Upravljanja rizicima projekta informacijskih sustava
Izvorni znanstveni članak
Ovaj članak predstavlja studiozan pregled ključnih čimbenika uspjeha projekta u provedbi informacijskog sustava u poslovnim sustavima. Članak
prikazuje rezultate teorijskih i praktičnih istraživanja, koja pokazuju da proces upravljanja razvojnim projektima informacijskih sustava ima mnogo
problema i neizvjesnosti u praksi, koji se unatoč brojnim poboljšanjima u području razvoja metoda, tehnika i alata još uvijek suočavaju s nekim
problemima i teškoćama u procesu implementacije integriranih informacijskih sustava. Upravljanje projektima implementacije ERP (planiranja resursa
poduzeća) je povezano s različitim specifičnim problemima, koji su bitno različiti od onih tradicionalnih informacijskog sustava razvoja, jer sadrže
strateške, taktičke, organizacijske čimbenike te čimbenike poslovnog okruženja.
Ključne riječi: ERP, informacijski sustav, upravljanje projektima
1
Introduction
There are many factors and changes that occur in an
increasingly competitive global business environment.
The process of managing project of implementation ERP
solutions to companies and business systems is a
fundamental activity which in the time of global
economic crisis sometimes can lead to deterioration of
those systems and companies, due to the implementation
failure. Some researches in the companies have shown
that in the world in about 90 % of implementation
projects of ERP solution the project consumes more
resources than originally planned. In more than 20 % of
project implementations, the same one was considered as
unsuccessful. Only 30 % of companies estimated that
ERP implementation was successfully completed [1].
Considering the capital investments of information
system implementations to companies and the fact that
many of these projects were unsuccessful, it was
necessary to identify analytical tools that will determine
the success of the implementation of information systems.
As analytical tools critical success factors were
investigated already in the seventies and eighties. At that
time, the "information revolutions" were global
information systems which provided the appropriate
information to business managers, which were seeking
appropriate solutions to easier make business decisions.
Based on provided information, managers were enabled to
easily perform the analysis of available information, to
identify the most relevant data and based on them to make
critical business decisions [2]. IT development and new
software solutions are integrating information technology
with a new, process-oriented business model. The
technical aspects of implementation are no longer the
most important elements, however, it is important to find
the balance between business process design and software
configuration on one hand, and corporate strategy and
organizational strategy on the other hand [3].
Table 1 Critical success factors model [4]
Organizational level
Strategic level
Support of top management
Management of changes
Management scope
Project team
Business Process Reengineering
Project manager
Managing projects
Participation of end-users
Trust between partners
Appropriate strategy for implementing entire solution
Tactical level
Commitment to employees and consultants
Good internal and external communication between
project members
Formalized project plan
Adequate training program
Elimination of systematic errors
The proper function of partners
Appropriate delegation of duties for project team
members
Proper software configuration
Technological level
Avoiding technically demanding adjustments
Supervision and monitoring performance
The choice of appropriate ERP solution and version
Data transfer from old ERP solution
Tehnički vjesnik 21, 6(2014), 1239-1242
1239
Risk management in information system projects
N. Denić et al.
In the literature there are numerous studies of eminent
experts in the field of critical success factors, which play
an important role in highlighting some of the most
important
aspects
in
the
implementation
of
comprehensive integrated solutions [5÷15]. One of the
studies about critical success factors is classifying them
into four levels: 1) strategic, 2) tactical, 3) organization
and 4) technological.
Experiences show that it is very important to follow
the unwritten rule that a man should learn from the
mistakes of others because all experiences are important.
In order to successfully complete implementation project,
we need to satisfy the success of all factors within certain
limits. The success, failure of some implementation
project or of information system update depends on a
relationship between strategic and tactical levels, how
each affects the other within the area of key success
factors. As proof of this theoretical study model,
appropriate measurements were conducted in companies,
and they show the customer satisfaction with new user
interface.
Feedbacks were taken from forty company users.
Work mode or performance measurement mode is derived
from conversations with users (approximately thirty
minutes with targeted customers), filing out surveys and
observation. Although the graphical user interface of the
new program is quite variable, we can easily conclude
that users have adapted well to its use. In fact, we can see
that users were not satisfied with the use of user interface
in the old ERP solution. The reason of that is that user
was using the old application, only a few months before
implementation of the new application. Answers and
results of key users of mySAP Business Suite project are
given below.
Table 2 The rating of the user interface
Measurement and formula
X = {1, 2, 3}
1 - full knowledge,
2 - partial knowledge,
3 - user does not have knowledge
Interpretation of
measurement
X = 1 and X = 2
Acceptable answer
Type of metric
scale
ordinal scale
Measurement type
X = mark
Measurement
Observation of the user experience
or questionnaire/survey
Table 3 The significance and comparison of KFU ERP projects in the region and worldwide [4, 16]
Clear objectives of strategy and of scope of introducing solution
Involvement and support of top management
The organization of the project team and its competences
Involvement and participation of users
Communication between the project team and with others in the organization
Communication within the project team
Training of end users
Business Process Reengineering
Hiring external consultants
The active role of the project sponsor
Transferring data from old solutions to ERP
As little as possible customization of ERP to organization specifics
Using the principles of project management
Clear goals, strategy and scope for the implementation of solution
Selection of ERP technology architecture
Technical
literature
2
1
3
9
7÷8
7÷8
4
5
11
13
10
15
12
6
14
Survey
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Figure 2 User interface evaluation of a new ERP solution
(1 - not mastered: 6; 2 - partially mastered: 14; 3 - fully mastered: 20)
Figure 1 The rating of user-interface -myNIS
We can conclude that support of the management is
required through all stages of project implementation.
1240
The project must be approved by the top management
in the early stages of its implementation and it needs to be
in accordance with the business objectives of that
company. If the top management is not directly involved
Technical Gazette 21, 6(2014), 1239-1242
N. Denić i dr.
in implementation of ERP solution, positive effects of the
project are impossible to be expected.
Company management needs to formally and
publicly explain that the project has the highest priority
and that they are committed to put all available company
resources to that project. We have an interesting research
in Computerwoche magazine [17] about difficulties in
area of implementing ERP systems, which was noticed by
managers (Tab. 4).
Upravljanja rizicima projekta informacijskih sustava
methods or they will require from the implementation /
maintains team to modify the system to support their
methods. That is the key moment when the ERP system
may fail. It is not necessary to mention why it is not
recommended to create some bigger change in ERP
software. Besides the risks of software bugs and inability
of standard performance software upgrade, the complete
functionality of the ERP system may be compromised.
Studies show that if your company has a resistance to
change, the more it is likely that the process of
implementation of ERP systems will fail.
3
Figure 3 Key success factors considering the conducted research in
practice
Table 4 What would the management change for re-introduction of the
ERP system?
80 % More attention to the optimization of the process
Implementation which is in accordance with
65 %
monitoring company goals
60 % More attention to cooperation of business segments
Introduction of the project leaders from relevant
55 %
factors
50 % The simultaneous implementation of MIS
45 % Intensive education
35 % Stronger involvement of the company representatives
35 % More courageous approach to changes
30 % A better proof of effectiveness
20 % Avoiding the big-bang implementation
From the above mentioned survey, we can see that
the most prominent problem is the lack of attention in the
optimization process. The reason is very simple, and yet
many times overlooked: no matter how much the
technology alone is effective, it cannot help the company
in achieving their business goals if business processes are
not carefully defined previously. Therefore, business
processes need to be improved, decisions (about which
processes should be changed or thrown away) need to be
made and after that implementation of modern
information technology tools can start.
2
Conclusion
From the above mentioned analysis we could say that
the most important key factor in the successfully
managing implementation project of new ERP solution or
updating existing information system is active support of
the company’s top management. Also, failure to comply
with established methodology has a negative impact on
the efficiency and effectiveness of the investment
processes as well as on economy and profitability of the
business system. ERP consists of a series of best practical
means of performing standard business processes. To get
the most out of this software, you have to convince people
in the company to accept the ways of performing business
processes in a manner as described in the software. If
people from different sectors-departments do not agree
with the described methods, and they think their current /
old methods are better, they will refuse to use the new
Tehnički vjesnik 21, 6(2014), 1239-1242
References
[1] Ho, C. F.; Wu W. H.; Tai, Y. M. Strategies for the
adaptation of ERP systems. // Industrial management &
data systems. 104, 3(2004), pp. 234-251.
[2] Caralli, R. A. The Critical Success Factor Method:
Establishing a Foundation for Enterprise Security
Management. Pittsburgh (PA): Carnegie Mellon Software
Engineering Institute, 2004.
[3] Gibson, N.; Holland, C. P.; Light, B. Enterprise Resource
Planning: A Business Approach to Systems Development.
// 32. Annual Hawaii International Conference on System
Sciences. Washington (DC): IEEE Computer Society, 1999,
pp. 1-9.
[4] Esteves-Sousa, J.; Pastor-Collado, J. Towards unification of
critical success factors for ERP implementations.
UniversitatPolitecnica
de
Catalunya.
URL:
http://www.army.mil/ArmyBTKC/docs/BIT2000.pdf.
[5] Nah, F. F. H.; Lau, J. L. S.; Kuang, J. Critical factors for
successful implementation of enterprise system. // Business
Process Management Journal. 7, 3(2001), pp. 285-290.
[6] Gunson, J.; de Basis J. P. The Place and Key Success
Factors of Enterprise Resource Planning (ERP) in the New
Paradigms of Business Management. CRM Today.
http://www.crm2day.com/library/EpFlAAAkElDCUAUBZ
U.php.
[7] Al-Mudimigh, A.; Zairi, M.; Al-Mashari, M. ERP software
implementation: an integrative framework. // European
Journal of Information Systems. 10, 4(2001), pp. 216-226.
[8] Aladwani, A. M. Change management strategies for
successful ERP implementation. // Business Process
Management Journal. 7, 5(2001), pp. 266-278.
[9] Chen, I. J. Planning for ERP systems: analysis and future
trends. // Business Process Management Journal. 7,
5(2001), pp. 374-386.
[10] Markus, M. L.; Axline, S.; Petrie, D.; Tanis, C. Learning
from Experience with ERP: Problems Encountered and
Success Achieved. Second-Wave Enterprise Resource
Planning: Implementing for Effectiveness. Cambridge:
Cambridge University Press, 2003, pp. 23-55.
[11] Denić, N. Menadžment informacioni sistemi, Beograd,
2010.
[12] Denic, N.; Dasic, B.; Maslovara, J. Profitability of the
investment project of introducing modern business
information systems. // TTEM - Technics Technologies
Education Management. 8, 1(2013), pp. 367-372.
[13] Simunovic, K.; Simunovic, G.; Havrlisan, S.; Pezer, D.;
Svalina, I. The role of ERP system in business process and
education. // Tehnicki Vjesnik-Technical Gazette. 20,
4(2013), pp. 711-719.
[14] Rigelhof, R. ERP Implementation Best Practices, 2003.
http://educase.edu/ir/library/powerpoit/EDU03146.pps.
[15] Wallace, T. F.; Kremzar, M. H. ERP: Making It Happen:
The Implementers' Guide to Success with Enterprise
Resource Planning. New York: John Wiley & Sons, 2001.
1241
Risk management in information system projects
N. Denić et al.
[16] Akkermans, H.; van Helden, K. Vicious and virtuous cycles
in ERP implementation: A case study of interrelations
between critical success factors. // European Journal of
Information Systems. 11, 1(2002), pp. 35-46.
[17] http://www.computerwoche.de/software/erp/
Authors’ addresses
Nebojša Denić, PhD
Faculty of Information Technology, Alfa University,
Palmira Toljatija 3, 11000 Belgrade, Serbia
denicnebojsa@gmail.com
Vidoje Moračanin, PhD
Faculty of Information Technology, Alfa University,
Palmira Toljatija 3, 11000 Belgrade, Serbia
vidoje.moracanin@alfa.edu.rs
Momir Milić, PhD
Faculty of Information Technology, Alfa University,
Palmira Toljatija 3, 11000 Belgrade, Serbia
Zoran Nešić, PhD
Faculty of Technical Sciences Čačak
University of Kragujevac
65, Svetog Save St., 32000 Čačak, Serbia
E-mail: zornes2002@yahoo.com
1242
Technical Gazette 21, 6(2014), 1239-1242
Engineering Management Journal
ISSN: 1042-9247 (Print) 2377-0643 (Online) Journal homepage: https://www.tandfonline.com/loi/uemj20
Critical Success Factors for Managing TechnologyIntensive Teams in the Global Enterprise
Hans J. Thamhain
To cite this article: Hans J. Thamhain (2011) Critical Success Factors for Managing TechnologyIntensive Teams in the Global Enterprise, Engineering Management Journal, 23:3, 30-36, DOI:
10.1080/10429247.2011.11431906
To link to this article: https://doi.org/10.1080/10429247.2011.11431906
Published online: 20 Apr 2015.
Submit your article to this journal
Article views: 236
Citing articles: 18 View citing articles
Full Terms & Conditions of access and use can be found at
https://www.tandfonline.com/action/journalInformation?journalCode=uemj20
Critical Success Factors for Managing TechnologyIntensive Teams in the Global Enterprise
Hans J.Thamhain, Bentley University
Abstract: The challenges of managing culturally diverse and
globally dispersed project teams are examined in a field study of
technology-intensive product developments. The article aims to
improve the understanding of team performance in multinational
project environments with implications for leadership assessment
and organizational development. The results suggest that
multinational team performance involves a complex set of
variables related to the organizational ambience, business process,
managerial tools, and most importantly, to the people in the
organization. Team leaders must effectively manage relations across
the entire work process, including support functions, suppliers,
sponsors, and partners. Emphasis on common values and goals helps
in bridging cultural and organizational differences, and in unifying
the multinational team. Personal interest, pride and satisfaction
with the work, professional work challenge, accomplishments,
recognition, and the skill sets of the team members were identified
as the strongest drivers toward unifying culturally diverse project
teams and their work processes, and building a true partnership
among all the contributing organizations.
Keywords: Global Project Management, Team Leadership,
Technology, Product Development
EMJ Focus Areas: Program & Project Management, Building
Engineering Management Actionable Knowledge, New Product
Development
T
he role of project teams is expanding with accelerating
globalization of our enterprises, leading to increased
pressures for effective management of these multi-national
teams (Snow et al., 1996; Smith and Blanck, 2002). As companies
leverage their operations across national borders to take advantage
of the best talent, most favorable cost, timing, and marketing
position, new challenges require sophisticated skill sets from
project leaders. Whether or not Yahoo! creates a new search
engine, Sony develops a new laptop computer, or the World
Health Organization rolls out a new information system—from
medical research to computer systems, companies try to leverage
their budgets and accelerate their schedules by forming alliances,
consortia, and partnerships with other firms, universities, and
government agencies. Furthermore, multinational teamwork
is being driven by business strategy. Enterprises such as IBM,
Boeing, or Microsoft have many of their product developments
spread across international borders in order to optimize access to
talents and markets (Armstrong, 2000; Kruglianskas and Thamhain,
2000; Manning et al., 2008; Shenhar et al., 2007). While this offers
great economic benefits, it also requires sophisticated managerial
skills, new work processes, and business models to achieve
collaboration and integration among geographically dispersed
and culturally diverse work groups (Ferrante, Green, and Forster,
2006; Groysberg and Abrahams, 2006; Martinez, 1995; Mehra et
al., 2006). As a result we have gained sophisticated knowledge and
substantial insight into the effects and organizational dynamics of
managing project teams (Anconda and Bresman, 2007; Hackman,
2006; Keller, 2001; Thamhain, 2008). Yet companies still struggle to
run projects well in a global enterprise setting (Salomo et al., 2010).
Why Focus on Leadership and Team Environment? Obviously,
the spectrum of influences to overall team performance and
project success is very broad (Barczak, 1995; Gemunden, 2011;
Kleinschmidt, 2011; Salomo et al., 2010); however, many prior
studies that have examined project team performance in a broad
organizational context specifically identified team leadership
and ambience among the critically important factors for success
(Aconda, 2007; Armstrong, 2000; Asgary et al., 2007; Chia-Chen,
2004; Hackman, 2006; Kratzer et al., 2011; Salomo et al., 2010).
As specifically stated by Chia-Chen, “…managerial leadership
and the organizational environment must be conducive to the
professional needs of the project team.” This view is also shared
in business practice. Managers often lament that relatively little is
known about the effectiveness of team leadership styles and the
organizational conditions most conducive to team performance
in project environments that are geographically dispersed across
national borders, operating in technological complex, culturallydiverse, multi-national environments, which is the focus of this
study.
As such, the study addresses the following research
questions:
• What type of organizational environment and working
conditions are most conducive to high project team
performance in multinational settings?
• What management style is most conducive to high project
team performance in multinational settings?
In the broader context of enterprise management, the
study connects with the organizational theory via the resourcebased view of the firm. This view suggests that company resources,
properly directed toward desired results such as leadership training,
talent scouting, supporting tools, and techniques can create
conditions favorably linked to team performance. In defining and
characterizing the team environment, these conditions seem to be
especially important to multinational undertakings (Snow et al.,
1996; Smith and Blanck, 2004), yet difficult to investigate because of
subtle influences and variations of organizational settings, policies,
This article is based on “Managing Technology-Intensive Project Teams in the Global Enterprise” by Hans Thamhain which appeared in
the proceedings of the 43rd Hawaii International Conference on Systems Science, Koloa, HI © 2010 IEEE.
30
Engineering Management Journal
Vol. 23 No. 3
September 2011
socio-political factors, and other antecedent conditions across
the multinational enterprise. These are part of the challenges and
limitations associated with the current exploratory field study.
Propositions
While it is premature to define and test specific hypotheses at this
exploratory stage of the research, I have developed 11 propositions
as a guideline for this investigation, as shown in Exhibit 1. These
propositions emerged from two sources: (i) discussions with
project leaders and senior managers, and (ii) observations made
during action research, both during Stage I of this study and earlier
exploratory field studies conducted between 2004 and 2007. These
propositions are consistent with the rationale and perspective
of multinational project management presented in the frontend of this article, providing the focus for the exploratory field
investigation, including designing questionnaires, conducting
interviews, and guiding observations.
Exhibit 1. Propositions Serving as Guidelines for this Field
Investigation
P1: Multinational team performance can be significantly influenced
by (i) local leadership, (ii) headquarter leadership and (iii) team
environment.
P2: A professionally stimulating work environment enhances
multinational collaboration and overall project performance
and success.
P3: Clear project objectives, directions and leadership are necessary
for effective cross-functional communications, collaboration
and commitment.
P4: Project ownership and commitment enhance cross-functional
communications, innovation and overall project performance.
P5: Useful organizational processes for technology transfer and
project integration are critically important for effective crossfunctional communications, collaboration, innovations and
overall project performance.
P6: Tangible rewards, such as recognition, bonuses and raises,
are important drivers for sustaining team collaboration,
commitment and innovative performance.
P7: A favorable project image of value, priority and probability of
success has a positive influence on team creativity and overall
performance.
P8: Good team spirit, mutual trust and respect enhance team
collaboration, communications and performance.
P9: The team leader’s competence and credibility (including trust
and respect by team members) is an important influence to
innovation, collaboration and team performance.
P10: Increased project complexity reduces team collaboration and
project performance (e.g. more failures).
P11: Job security and organizational stability have a positive
influence to on team collaboration and the ability to deal with
risk and conflict.
Objectives, Scope and Method
The objective of this article is to improve the understanding of (i)
the dynamics and interaction of multi-national, culturally diverse
project teams, (ii) the influences of the team environment, and
(iii) the influences of managerial leadership on performance. The
specific focus is on technology-based, geographically dispersed
project environments. The research reported here includes the
Engineering Management Journal
Vol. 23 No. 3
most recent phase of an ongoing exploratory field study into
multinational project organizations. The article summarizes
and expands on the earlier, more quantitative part of this study
(Thamhain 2009, 2010). The methodology for the combined
study is discussed next.
Using an exploratory research format, the design of this threephase field investigation, conducted between 2004 and 2010, is
summarized in Exhibit 2. The field study yielded data from 42 project
teams with a total sample population of 495 project professionals
such as engineers, scientists, and technicians, plus their managers,
including 16 functional resource managers, 42 project team leaders,
18 product managers, eight directors of R&D, seven directors of
marketing, and 11 general management executives at the vice
presidential level. Together, the data covered over 112 technologybased projects in 27 large, “Fortune-500” type enterprises, spanning
a total of 18 countries. The purpose of this combined three-stage
data collection method is to leverage the information-gathering
process for identifying the drivers and barriers to project team
performance and for gaining insight into its management process.
This combined method is particularly useful for new and
exploratory investigations, such as the study reported here, which
is considerably outside the framework of well-established theories
and constructs (Glaser and Strauss, 1967; Eisenhardt, 1989). The
format and process of the specific questionnaires and in-depth
semi-structured interviews used in this study was developed and
tested in previous field studies of project management, similar in
context to the current investigation (Kruglianskas and Thamhain,
2000; Thamhain, 2004, 2009, 2010). The methodological details of
the data collection and analysis are tabulated in Exhibit 2.
Results
The empirical results, supported by the Kendall Tau Rank-Order
Correlation shown in Exhibit 3, suggest that among the four subsets
of data analyzed (people, work content, work process/tools, and
enterprise environment), the people side together with its culture,
values, and skill sets, seem to have the strongest influence on
team performance and overall project success. These influences
also correlate strongly to other desired characteristics of the team
environment, such as work process, communication effectiveness,
and work integration. The most significant associations point at
the importance of professional esteem needs and managerial
leadership as particularly favorable influences on project team
performance. Specifically: 1) professionally stimulating and
challenging work environments [τ=.45], 2) opportunity for
accomplishments and recognition [τ=.38], 3) clearly defined
organizational objectives relevant to the project [τ=.36], 4) job
skills and expertise of the team members appropriate for the
project work [τ=.36], 5) overall directions and team leadership
[τ=.35], 6) trust, respect, and credibility among team members
and their leaders [τ=.30], 7) business process, as reflected by crossfunctional cooperation and support [τ=.27], 8) clear project plans
[τ=.25], and 9) clearly defined authority relations, and sufficient
autonomy and freedom of actions in line with the managerial
expectations and accountabilities [τ=.23]. While many of these
factors, such as clear objectives, skill sets, and effective business
process deal with conventional project management practices, they
also relate to the human side, conditioning the work environment
for success. Hence, in a complex project environment that relies
on commitment, buy-in, and personal drive for success, these
influences appear to deal effectively with the integration of goals
and needs between the team member and the organization. In
this context, the more subtle factors seem to become catalysts
September 2011
31
Exhibit 2. Summary of Three-Stage Research Method
STAGE I
STAGE II
STAGE Ill
Scope and Objective
On-site observations and
interviews to understand
research environment and
issues, propositions and
questionnaire
Data collection via
questionnaire, observation
and expert panel (action
research)
In-depth retrospective
interviewing, gaining
perspectives and additional
information, leveraging the data
collected in Stage II
Time Frame
2005-2007
2007-2008
2008-2010
Unit of Analysis
Project
Project
Project
No formal data collection
(exploratory only)
PRIMARY: ·Overall team, performance • Project success
Data
Dependent Variables (Team
Performance)
-Judged by senior management-
Independent Variables and Antecedent
Conditions (Characteristics of Team
Environment)
SECONDARY: • Innovation and creativity • Change orientation
and response rate ·Self-direction/ little supervision •
Customer/client interface efficiency • Ability to resolve conflict
• Dealing with risk and uncertainty • Personal effort and
commitment ·Effective communications • Schedule and
budget performance
No formal data collection
(exploratory only)
-Judged by team members20 variables of the team environment listed in Exhibit 2:
• Interesting Work • Recognition/Accomplishments
• Clear Organizational Objectives • Job Skills and Expertise •
Direction and Leadership ·Trust/Respect/Credibility ·CrossFunctional Support ·Clear Project Plan and project Support •
Autonomy and Freedom ·Career Development opportunity
• Job Security ·Salary/Raise/Bonuses ·Compensatory Time •
Project Visibility • Team Maturity • Project Duration • Project
Stability • Organizational Stability • Technological Complexity
• Project Size and Complexity
Data Collection Method
Interviews, observations,
expert panels, focus groups
Questionnaires augmented by
interviews
Retrospective interviews,
expert panels and focus
groups
Data Analysis
Content analysis
Kendall's Tau rank-order
correlation'
Content analysis
Record analysis
Kruskai-Walles analysis of
variance by ranks'
Critical thinking
Sample
Number of companies
Type of companies
Number of projects
Project type
Projects size
Project duration
Number of multi-national partners
Number of project teams (and team
members)
Management personnel
Record analysis
Critical thinking
12
27
18
High-tech, Fortune 500
High-tech, Fortune 500
High-tech, Fortune 500
250
NDP, R&D
$1.2M (average), sd +/-.5M
19 mos (average), sd +/-7mos
112
NDP, R&D
$1.2M (average), sd +/-.SM
19 mas (average), sd +/-7mos
125
NDP, R&D
$1 .2M (average), sd +/-.SM
19 mos (average), sd +/-7mos
18
21 (33)
18
42 (450)
42 PMs; 8 Mktg Directors; 7
R&D Directors, 11 GMJVPs
18
42 (68)
18 PMs; 5 Mktg Directors; 4
R&D Directors. 11 GMJVPs
18 PMs; 5 Mktg Directors; 4
R&D Directors, 4 GMNPs
The causal relationship among the 31 variables investigated is highly intricate and complex, with cause and effect not always
definable. Therefore, the traditional/conventional reflective measurement model may not be appropriate, but may need to be replaced
in part by a formative model. In addition, many of the organizational and behavioral variables investigated contain ordinal
measurements which do not follow normal distribution, distribution-free non-parametric methods, such as Kendall's Tau rank-order
correlation and Kruskai-Waffis analysis of variance by ranks, have been chosen to evaluate the survey data of Stage-11.
32
Engineering Management Journal
Vol. 23 No. 3
September 2011
for cross-functional communication, information sharing, and
ultimate integration of the project team with focus on desired
results. All associations are significant at p =0.10 or better, with
the most significant correlations (p = .01 or stronger) shown in
bold, giving support to the first nine Propositions P1—P9.
It is interesting to note that many characteristics of the
work environmental that were perceived by managers as important
and influential to effective team performance did not correlate
significantly as measured by a p-level threshold of 0.10. Others
resulted even in negative correlations. As summarized in Exhibit 3,
the factors of lesser influence to project team performance are: #10)
career development [τ=.12], #11) job security [τ=.12], #12) salary
increases and bonuses [τ=.15], #13) time-off [τ=.15], #14) project
visibility and popularity [τ=.12], and #15) maturity of the project
team, measured in terms of time worked together as a team [τ=.10].
In addition, several conditions of the work environment actually
correlated negatively to performance although they were seen by
the majority of project managers as important positive drivers. As
summarized in Exhibit 3, they include: #16) project duration [τ=
-.08], #17) project requirements, stability, and minimum changes
[τ= -.10], #18) stable organizational structures and business
processes technological complexities, such as dependencies on
multiple technologies, technological disciplines, and processes,
#19) technical complexity [τ= -.15], and #20) project size and
project complexity, suggesting that project scope, size, and
implementation challenges by themselves do not necessarily
translate into lower team or project performance [τ= -.18].
Although the statistical significance of these “lesser associations
(#10-#20)” is weak, it is interesting to observe that several of these
influences actually seem to have opposite effects to those popularly
held by managers; therefore, the statistics do not support the second
part of P6 that falsely included bonuses and raises as an important
driver to team performance. Nor does it support Proposition P10
which falsely argues that project size and complexity have an
unfavorable influence on the desirable team characteristics and
performance.
For the conditions with favorable associations to team
performance influences, it is not surprising but yet interesting,
to note that these conditions produce desirable characteristics
in all variables of the team environment such as work process,
communication effectiveness, and work integration. For example,
project teams that indicated a high degree of professionally
Exhibit 3. Multinational Team Environment vs Performance (Kendall's τ RankOrder Correlation)
Exhibit 3. Multinational Team Environment vs Performance (Kendall’s τ Rank-Order Correlation)
Engineering Management Journal
Vol. 23 No. 3
September 2011
33
stimulating work, work challenge, recognition, trust, and respect
were also seen by their managers as being able to deal effectively
with technology transfers, client interfaces, changes, risks, and
cross-functional communications, all components that are part
of the work process. This association was specifically tested via
Kendall-Tau and Kruskal-Wallis analysis of variance by rank.
These correlations show at a high level of statistical significance
that project teams who see themselves working in a professionally
stimulating environment also seem to be part of a more effective
work process, and use work-related tools and techniques
effectively across multinational borders. The field study shows
that the conditions that create an interesting and stimulating
work environment, also serve as bridging mechanisms between
the mission goals of the enterprise and the professional needs
of the project team. This is especially helpful in complex multinational and technology-based project environments where it is
often difficult for team members to see the big corporate picture,
but more likely for team members to see the organizational
environment conducive to their professional needs if they find the
work professionally interesting and stimulating. Another of these
bridging mechanisms is the effective leadership and involvement
of all project stakeholders throughout the organization and its
external partners, lending general support to P1 and P9. Managers
point out that, for today’s technology-based projects, success is
no longer the result of a few geniuses, experts, and skilled leaders.
Rather, project success depends on effective multidisciplinary
efforts, involving teams of people and support organizations
interacting in a highly complex, intricate, and sometimes even
chaotic way. Especially for multi-national efforts, the process
requires experiential learning, trial and error, risk taking, and
cross-functional coordinating in support of technology transfer
and integration, a complex process that is being seen by many
managers as fuzzy, difficult to describe or predict results with
certainty.
Guidelines for Effective Team Management
The lessons that emerged from the combined three stages of
this field study have been organized into ten guidelines for
leading and working effectively with culturally diverse project
teams. The retrospective interviews and on-site observations
from the action research of Stage-III were especially helpful in
validating and clarifying the statistical results of Stage-II, and
to go beyond the conclusions reached from the quantitative
data, gleaning additional implications useful to the practice of
project management and some future research. While these
guidelines emphasize the importance of conditioning the project
environment for cooperation, connectivity, and unification during
the early stages of project formation and start-up, management
must pay continuous attention to these conditions and critical
success factors throughout the project lifecycle. The suggestions
advanced below provide an overall framework for managerial
actions and leadership, conditioning the multinational project
environment for effective teamwork.
1. Define the Team Structure, Work Process, and Communication
Channels. Management must provide an infrastructure
conducive to effective cross-functional teamwork and
technology transfer. This includes properly defined interfaces,
task responsibilities, reporting relations, communication
channels, and work transfer protocols. Most of the tools
for systematically describing the work process and team
structure come from the conventional project management
system: project charter—defining the mission and overall
34
2.
3.
4.
5.
responsibilities of the project organization, including
performance measures and key interfaces; project
organization chart—defining the major reporting and
authority relationships; responsibility matrix or task roster;
project interface chart such as the N-Squared Chart; and
job descriptions and well-defined phase-gate criteria. All of
these tools have been used by project managers for a long time;
however, to be effective in multinational settings, they need to
be fine-tuned and calibrated to the specific project situation
and carefully integrated with the overall business process and
its multi-cultural environment. Moreover, communication
channels must be linked and effectively web accessible to all
project team members.
Build a High-Performance Image. Project teams which have
a clear sense of purpose and confidence in their mission,
perform better. A high-performance image stimulates
the team’s interest, pride of participation, and sense of
ownership. Common goals and shared can-do images
serve as a bridging mechanism, helping to unify the team
across the miles and cultures. This also builds professional
confidence and encourages team members to reach “outsidethe-box” to resolve issues “locally” with a minimum of
central administrative support. Project leaders and senior
managers can build a favorable project image by making
the project visible and stressing its importance via media
exposure, management involvement, and budgetary actions
as well as by emphasizing critical success factors, professional
opportunities, and potential rewards. These factors promote
project ownership and a sense of unity behind the project
objectives.
Stimulate Enthusiasm, Excitement, and Professional Interests.
Factors that satisfy personal and professional needs have
the strongest effect on team unification across the miles
and on overall project performance. The most significant
performance drivers derive from the work itself—personal
interest, pride and satisfaction with the work, professional
work challenge, accomplishments, and recognition.
Whenever possible managers should try to accommodate
the professional interests and desires of their personnel.
Interesting and challenging work is a perception that can be
enhanced by the visibility of the work, management attention
and support, priority image, and the alignment of personnel
values with organizational objectives.
Adapt Project Management Tools, Techniques, and Leadership
to Local Culture. With the globally dispersed project activities,
success depends not only on the effective use of managerial
tools and leadership style in one particular location, but
equally important, on the effective use of these techniques
across different geographic regions that often incorporate
great differences in their organizational cultures; therefore,
it is important to adopt management tools, techniques,
and leadership style to local cultures and organizational
values without losing consistency, purpose, and managerial
integrity.
Unify Management Process. Effective technology transfer
and integration is crucial to the success of any project. It is
particularly challenging in geographically distributed and
culturally diverse project teams. “Top-down” or centralized
management is often too rigid for coping with the dynamics
and non-linearity. What seems to work best is a skillfully
designed management process with enough flexibility
and adaptability to local leadership that understands the
Engineering Management Journal
Vol. 23 No. 3
September 2011
established norms and cultures, and is respected by the
local people. Focus groups, organizational studies and
developments, internal and external consultants, process
action teams, professional training and teambuilding
sessions, all are powerful tools for unifying and optimizing
the work flow and for managing the process.
6. Ensure Senior Management Support. Senior management
support is critically important to project performance.
Effective working relationships among resource managers,
project leaders, and senior management across the whole
project organization, all help to build a favorable image
toward project visibility and priority, and help to unify the
team across its cultures and geographic boundaries.
7. Promote Self-Direction and Commitment. With the shift
toward more self-directed teams, more flexible and less
hierarchical organizations, management control is based
to a large extent on commitment, motivation, and local
team leadership. Senior management needs to work with
all organizations across the project to build strong linkages
between the local teams, their support systems, and the
sponsor organization.
8. Share Managerial Power and Influence. Given the political
nature of organizations, the diversity of organizational
culture, and differences in regional management style, power
is often shared between managers of local organizations
and the project management office (PMO) at corporate
headquarters. Shifts in power and influence among regional
organizations are quite common and natural; however, they
can have negative effects on cooperation and commitment,
and should be monitored, examined, and dealt with to avoid
the risk of organizational tension, mistrust, conflict, and
power struggle.
9. Recognize Differences in Management Style and Philosophy.
The field observations and interviews provide us with some
insight into the diverse managerial thoughts and leadership
styles of culturally different regions. This explains in part
the difficulties experienced by managers in multinational
environments trying to establish a common project
management process and a unified framework for direction
and leadership. The findings suggest the critical importance
of adapting headquarters leadership and methods of control
to the local level, a point that had already been made
earlier. Further, effective managerial role performance can
be enhanced via multicultural training and organizational
development at all levels of the project organization.
10. Foster a Culture of Continuous Support and Improvement.
Culturally diverse teams are intrinsically complex, highly
dynamic, and continuously changing. Management can
establish “listening posts” such as discussion groups, action
teams, and suggestion systems that capture the “voice of the
project stakeholders” as well as the lessons learned from
past project experiences. Tools such as the Project Maturity
Model, Six Sigma, and Agile project management process
can provide a useful framework and the basis for analyzing,
developing, and continuously improving the management
process. Clearly all of these areas represent fruitful grounds
for future research toward effective use in multinational project
ventures.
Conclusions
The empirical results presented in this article show that effective
management of globally dispersed project teams involves
Engineering Management Journal
Vol. 23 No. 3
a complex set of variables that relate to the organizational
environment, business process, managerial tools, and most
importantly, to the people in the organization. In many cases, the
people issues have the strongest impact on project performance.
People are an intricate part of most organizational subsystems;
therefore, issues affecting people eventually impact the whole
project organization and the broader enterprise. Management
cannot expect to create a unified project team, working seamlessly
across borders and cultures, by simply issuing work orders, project
summary plans, or management guidelines. Emphasis must be on
common values and goals, rather than on differences, to focus and
unify the team. Personal interest, pride and satisfaction with the
work, professional work challenge, accomplishments, recognition,
and the skill sets of the team members act most favorably toward
unifying culturally diverse project teams and their work processes.
These conditions serve as bridging mechanisms, helpful in
enhancing project performance in multi-cultural organizations.
By recognizing the greater autonomy of all international partners
as well as their cultural differences, management can build a true
partnership among all of the contributing organizations with strong
linkages for communication, decision making, and technology
transfer. Moreover, to be sustainable, these multinational alliances
must not only be built at the beginning of the project life cycle, but
continuously be refueled and maintained over the lifetime of the
project.
References
Anconda, Deborah, and Henrik Bresman, X-Teams: How to Build
Teams That Lead, Innovate and Succeed, Harvard Business
School Publishing (2007).
Anconda, Deborah, Thomas W. Malone, Wanda J. Orlikowski, and
Peter M. Senge, “It’s Time to End the Myth of the Incomplete
Leader,” Harvard Business Review, 85:1 (2007), pp. 92-100.
Armstrong, David, “Building Teams Across Borders,” Executive
Excellence, 17:3 (March 2000), p. 10.
Asgary, Nader, and Hans Thamhain, “Managing Multinational
Project Teams,” (Proceedings, Annual Meeting of the
Association for Global Business, (November 2007).
Barczak, Gloria, “New Product Strategy, Structure, Process,
and Performance in the Telecommunications Industry,”
Journal of Product Innovation Management, 12:2 (1995),
pp. 224-234.
Chia-Chen, Kuo, ”Research on Impacts of Team Leadership
on Team Effectiveness,” Journal of American Academy of
Business, 5:1/2 (2004), pp. 266-277.
Ferrante, Claudia J., Steve G. Green, and William R. Forster,
“Getting More Out of Team Projects: Incentivizing Leadership
to Enhance Performance,” Journal of Management Education,
30:6 (2006), pp. 788-798.
Gemunden, Hans Georg, Sören Salomo, and Axel Krieger,
“The Influence of Project Autonomy on Project Success,”
International Journal of Project Management, 23:3 (2005),
pp. 366-373.
Groysberg, Boris, and Robin R. Abrahams, “Lift Outs:
How
to
Acquire
a
High-Functioning
Team,”
Harvard Business Review, 84:12 (2006), pp. 133-143.
Hackman, J. Richard, “The Five Dysfunctions of a Team: A
Leadership Fable,” Academy of Management Perspectives,
20:1 (2006), pp. 122-125.
Kearney, Eric, Diether Gebert, and Sven Voelpel, “When and How
Diversity Benefits Teams,” Academy of Management Journal,
52:3 (2009), pp. 350-372.
September 2011
35
Keller, Robert T., “Cross-Functional Project Groups in Research
and New Product Development,” Academy of Management
Journal, 44:3 (2001), pp. 547-556.
Kleinschmidt Elko J., Ulrike de Brentani, and Sören Salomo,
”Performance of Global New Product Development
Programs: A Resource-Based View,” Journal of Product
Innovation Management, 24:2 (2007), pp. 419-441.
Kratzer Jan, Hans Gemunden, and Christopher Lettl, ”The
Organizational Design of Large R&D Collaborations and Its
Effect on Time and Budget Efficiency,” IEEE Transactions on
Engineering Management, 58:2 (May 2011), pp. 295-306.
Kruglianskas Isak, and Hans Thamhain, “Managing TechnologyBased Projects in Multinational Environments,” IEEE
Transactions on Engineering Management, 47:1 (2000),
pp. 55-64.
Manning Stephan, Silvia Massini, and Arie Y. Lewin, “A Dynamic
Perspective on Next-Generation Offshoring: The Global
Sourcing of Science and Engineering Talents,” Academy of
Management Perspectives, 22:3 (2008), pp. 35-54.
Martinez, Erwin V., “Sussessful Reengineering Demands IS/
Business Partnerships,” Sloan Management Review, 36:4 (1995),
pp. 51-60.
Mehra Ajay, Brett Smith, Andrea Dixon, and Bruce Robertson,
“Distributed Leadership in Teams: The Network of Leadership
Perception and Team Performance,” Leadership Quarterly,
17:3 (2006), pp. 232-245.
Salomo Sören, Elko Kleinschmidt, and Ulrike de Brentani,
“Managing New Product Developments in a Globally Dispersed
NPD Program,” Journal of Product Innovation Management,
27:7 (December 2010), pp. 955-971.
Shenhar Aaron, Dove Dvir, Dragon Milosevic, and Hans
Thamhain, Linking Project Management to Business Strategy,
Project Management Institute (PMI) Press (2007).
Smith, Preston G., and Emily L. Blanck, “From Experience:
Leading Dispersed Teams,” Journal of Product Innovation
Management, 19:2 (2002), pp. 294-304.
36
Snow Charles C., Sue C. Davison, Scott A. Snell, and Donald
C. Hambrick, ”Use Transnational Teams to Globalize Your
Company,” Organizational Dynamicas, 32:4 (Spring 1996),
pp. 20-32.
Thamhain, Hans, “Managing Technology-Intensive Project Teams
in the Global Enterprise;” Proceedings, Hawaii International
Conference on System Science, HICSS-43, January 5-8, 2010.
Thamhain, Hans, “Managing Globally Dispersed R&D Teams,”
International Journal of Information Technology and
Management (IJITM), 8:9 (2009), pp. 107-126.
Thamhain, Hans, “Team Leadership Effectiveness in TechnologyBased Project Environments,” IEEE Engineering Management
Review, 36:1 (2008), pp. 165-180.
Thamhain, Hans, “Leading Technology Teams,” Project
Management Journal, 35:4 (December 2004), pp. 35-47.
Thamhain, Hans, “Linkages of Project Environment to
Performance: Lessons for Team Leadership,” International
Journal of Project Management, 22:7 (October 2004),
pp. 90-102.
Zanoni, Roberto, and Jorge Luis Nicolas Audy, “Project Management
Model for Physically Distributed Software Development
Environment,” Engineering Management Journal, 16:1 (2004),
pp. 28-34.
About the Author
Hans Thamhain is a professor of management and director
of MOT and project management programs at Bentley
University, Boston/Waltham. He has held management
positions with Verizon, General Electric, and ITT, and has
written over 70 research papers and six professional reference
books. Dr. Thamhain received the IEEE Engineering Manager
Award in 2001, PMI’s Distinguished Contribution Award in
1998 and PMI’s Research Achievement Award in 2006.
Contact: Hans Thamhain, Bentley University; phone:
781-891-2189; hthamhain@bentley.edu
Engineering Management Journal
Vol. 23 No. 3
September 2011
Journal of the Association for Information
Research Article
IT Capabilities, Process-Oriented Dynamic
Capabilities, and Firm Financial Performance*
Gimun Kim
Konyang University
gmkim@konyang.ac.kr
Bongsik Shin
San Diego State University
bshin@mail.sdsu.edu
Kyung Kyu Kim
Yonsei University
kyu.kim@yonsei.ac.kr
Ho Geun Lee
Yonsei University
h.lee@yonsei.ac.kr
Abstract
More and more publications are highlighting the value of IT in affecting business processes. Recognizing firmlevel 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. Processoriented 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 IT management capabilities
IT infrastructure flexibility process-oriented dynamic capabilities 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
* Varun Grover was the accepting senior editor. This article was submitted on 9th February 2009 and went
through six revisions.
Volume 12, Issue 7, pp. 487-517, July 2011
Volume 12 Issue 7
IT Capabilities, Process-oriented Dynamic
Capabilities, and Firm Financial Performance
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.g., technological changes) can have dramatic
impacts on a firm’s abilities in terms of market competition (Salvato, 2009). In addition, a firm’s ability
to make changes in business processes in a dynamic fashion (though gradual) indicates its readiness
to undergo other radical reconfigurations effectively when the situation demands.
Our research offers two primary contributions to the IS community. The first is to compare the
outcomes of two different modeling approaches (direct vs. indirect modeling). Scholars have taken
different avenues to elucidate the relationship between IT and firm performance. Some studies are
based on the modeling approach, in which IT capabilities and firm performance are directly tied;
others treat the relationship as indirect (Pavlou & El-Sawy, 2006; Wade & Hulland, 2004). This
difference in the modeling paradigm makes it difficult to compare findings of existing studies. To
facilitate comparison, our study utilizes PDCs, the ability to improve business processes to respond to
changing market environments, as a differentiator between the two models.
Second, we examine the interrelationships among three primary IT capability constituents (i.e., IT
personnel expertise, IT management capabilities, and IT infrastructure flexibility). A literature review
indicates that the primary focus of existing studies has been to understand the contribution of IT
capabilities toward creating business value. Consequently, the issue of the dynamics among different
types of IT capabilities has been largely overlooked.
With previous research contributions in mind, we propose a research model that depicts how
enhanced IT capabilities ultimately result in improved financial performance (Figure 1). The research
model includes the following constructs: perceived financial performance, PDCs, and IT capabilities
(i.e., IT infrastructure flexibility, IT personnel expertise, and IT management capability). The operating
presumption is that IT capabilities influence PDCs and, subsequently, a firm’s financial performance.
As for the relationships among IT capabilities, we expect IT personnel expertise to influence IT
infrastructure flexibility and IT management capability directly. It is also anticipated that IT
management capability affects the level of IT infrastructure flexibility.
488
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
Kim et al. / IT Capabilities & Firm Performance
IT Capabilities
IT Management
Capability
H4
H7
H3
IT Infrastructure
Flexibility
H5
H6
H1
Process-Oriented
Dynamic Capabilities
(PDCs)
Firm
Performance
• perceived
financial
performance
H2
IT Personnel
Expertise
Figure 1. Research Model
In order to test the integrity of the research model, the study proceeds as follows. In section 2, we
review existing literature and theories and characterized and propose relevant hypotheses. We
describe details of the research method utilized for this study in Section 3. Section 4 summarizes the
results of our data analysis based on structural equation modeling. Section 5 discusses the findings
and contribution of this work from two different perspectives. Section 6 concludes by discussing the
limitations of this study and possible directions for future research.
2. Literature and Hypotheses
2.1. IT and Firm Performance
Early studies of IT business value examined the impact of IT investment on organizational performance,
primarily at the firm level (Melville, Kraemer, & Gurbaxani, 2004). Many of them relied on the production
function approach (or black box approach), in which a mathematical specification is defined based on
microeconomic theory, and utilized to link production inputs (e.g., labor, IT, other capital) and outputs
(e.g., quality and quantity) directly (e.g., Brynjolfsson & Hitt, 1996). However, this research paradigm
was grounded on the simplistic idea that IT provides the tools necessary to transform inputs to outputs
effectively (Orlikowski & Iacono, 2001). Early empirical studies that relied on the black box approach
lack consistency in explaining the association between IT investment and organizational performance;
they set off the controversy of the IT productivity paradox (Brynjolfsson, 1993).
To tackle the productivity paradox problem, arguments have been made that research on IT business
value should investigate the effects of IT on business processes (Ray, Barney, & Muhanna, 2005).
Proponents point out that it is the process (e.g., a better way of doing things) rather than the product
where IT makes a true impact (McAfee & Brynjolfsson, 2008). Naturally, relying on the black box
approach means a loss of statistical power in determining the meaningful relationship between IT
investment and organizational performance because of the large distance (i.e., temporal gap)
between them (Barua Kriebel, & Mukhopadhyay, 1995). Studies grounded on the process model have
shown more consistent and explanatory results (Ravichandran & Lertwongsatien, 2005).
489
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
Kim et al. / IT Capabilities & Firm Performance
Recently, researchers have depended primarily on the resource-based view (RBV) as the main
theoretical framework to understand the relationship between IT and its business value. The RBV
argues that competitive advantage emerges from unique combinations of resources that are
economically valuable, scarce, and difficult to imitate (Barney, 1991; Grant, 1991). These resources
are heterogeneously distributed across firms, and their innate traits--such as path dependency,
embeddedness, and causal ambiguity--make them a springboard for competitive advantage (Barney,
1991). The IT capability literature recognizes that competence in mobilizing and deploying IT-based
resources is a source of competitive advantage and differentiates firm performance (Bharadwaj,
2000; Piccoli & Ives, 2005; Ha & Jeong, 2010). As seen in Table 1, recent studies of IT capabilities
performed on the basis of RBV take both direct (e.g., Bhatt & Grover, 2005; Powell & Dent-Micallef,
1997) and indirect (e.g., Pavlou & El-Sawy, 2006; Tippins & Sohi, 2003) views in understanding the
linkage between IT capabilities and firm performance. Studies grounded on the two research
paradigms generally report positive associations between IT capabilities and firm performance.
Table 1. Summary of RBV-based Studies
Study Type
Linkage between IT
Capabilities and
Firm Performance
Statistical Significance of Links
Mata, Fuerst, and
Barney (1995)
Conceptual
Direct
N/A
Ross Beath, and
Goodhue (1996)
Conceptual
Direct
N/A
Empirical
Direct
IT human resources firm performance (o)
Business resources firm performance (x)
Technology resources firm performance
(x)
Bharadwaj,
Sambamurthy, and
Zmud (1998)
Conceptual
Direct
N/A
Bharadwaj (2000)
Empirical
Direct
IT capability firm performance (o)
Santhanam and
Hartono (2003)
Empirical
Direct
IT capability firm performance (o)
Tippins and Sohi
(2003)
Empirical
Indirect
IT competency organizational learning (o)
firm performance (o)
Sambamurthy,
Bharadwaj, and Grover
(2003)
Conceptual
Indirect
N/A
Melville et al. (2004)
Conceptual
Indirect
N/A
Empirical
Indirect
Related Studies
Powell and DentMicallef (1997)
Ravichandran and
Lertwongsatien (2005)
Bhatt and Grover
(2005)
Empirical
Direct
Pavlou and El-Sawy
(2006)
Empirical
Indirect
IT capabilities IT support for core
competencies) (o) firm performance (o)
IT infrastructure quality competitive
advantage (o)
IT business expertise competitive
advantage (o)
relationship infrastructure competitive
advantage (o)
IT leveraging competence process
capabilities (dynamic and functional) (o)
competitive advantage (o)
Note: (o) significant link, (x) insignificant link
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
490
Kim et al. / IT Capabilities & Firm Performance
2.1.1. PDCs and financial performance
As stated, PDCs represent a firm’s capacity to change organizational processes to achieve better
integration, cost reduction, and business intelligence. Enhanced PDCs, thus, should increase the
effectiveness of a firm’s operational processes by allowing the acquisition and assimilation of internal
and external knowledge, configuration/reconfiguration of the resource base, and
deployment/redeployment of resources to be aligned with the firm’s corporate vision (Liao, Kickul, &
Ma, 2009). Firms with excellent PDCs are expected to remedy ineffective operational processes
better, faster, and cheaper than the competition, and turn them into processes responsive to changing
business environments (Butler & Murphy, 2008; Eisenhardt & Martin, 2000). Such firms can
outperform competitors by reacting more effectively to changing environments through enhanced
communication, coordination, and information-sharing (Tippins & Sohi, 2003). Also, PDCs can result in
timely and accurate decision making (Davenport & Short, 1990; Eisenhardt & Martin, 2000; Sher & Lee,
2004). Excellent PDCs, therefore, are expected to engender better firm performance and give firms a
competitive advantage (Pavlou & El-Sawy, 2006; Rothaermel & Hess, 2007; Zollo & Winter, 2002).
However, the presumption that stronger PDCs automatically result in better financial performance
should be made with caution, because the benefits of process improvement may be diluted or
neutralized before they affect a firm’s financial performance, which is the ultimate bottom line. For
example, the benefits may be shared with business partners in such forms as incentives, or they may
be channeled to improve customer satisfaction through lower costs and higher product/service quality
(Hitt & Brynjolfsson, 1996; Ray, Barney, & Muhanna, 2004). Accordingly, our empirical efforts examine
the relationship between a firm’s PDCs and its financial performance by hypothesizing that:
Hypothesis 1: PDCs of a firm are positively associated with its financial performance.
2.2. IT Capabilities and PDCs
The IT function is an independent organizational function, just like marketing or R&D. Most IS studies
utilize a taxonomy of organizational resources, as outlined by Grant (1991) or Barney (1991), as their
theoretical basis. Grant (1991) divided organizational resources into tangible, personnel-based, and
intangible resources. Barney (1991) categorized organizational resources into physical capital, human
capital, and organizational capital resources. These taxonomy schemes, although they differ in their
terminology, are similar in that they reflect physical (e.g., equipment), human (e.g., individual skill or
knowledge), and organizational (e.g., structure, rules, relationships, and culture) aspects.
Table 2 summarizes typologies of IT resources or capabilities that previous studies have introduced.
One notable observation is that most IS studies utilize taxonomy schemes in which physical and
human resources/capabilities are consistently mapped onto IT functions (e.g., technical IT resources
and human IT resources). However, efforts to translate organizational resources/capabilities into
those germane to the IT function in a systematic fashion have been generally lacking (Melville et al.,
2004). Table 2 demonstrates that organizational resources investigated by existing studies can be
classified more divergently than simply as physical or human resources. In addition, certain variables
in studies of organizational resources/capabilities (e.g., access to capital, business resources,
complementary organizational resources, and culture of IT use) are not necessarily native to the IT
function. The lack of such definitional convergence in organizational IT resources/capabilities
research makes it difficult to track the cumulative progress of the domain research.
The IT function encompasses tasks that are highly distinct from other business functions, and
accordingly, IT personnel develop, retain, and reproduce their own organizational
resources/capabilities. For example, the IT function has its own rules (e.g., prioritization of IT projects,
performance measures of IT function and staff), structures (e.g., distribution of IT function to business
units), policies (e.g., IT roadmap and vision, IT enterprise architecture, balancing strategic and tactical
initiatives of IT), business relationships (e.g., appointment of IT relationship managers), and other
things (e.g., IT compliance to regulation, IT sourcing, and rolling budget plans in sync with changing
business strategies) necessary to design, deploy, and manage IT infrastructure and support business
clients (Bharadwaj, 2000; McKeen & Smith, 2008).
491
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
Kim et al. / IT Capabilities & Firm Performance
Table 2. Typologies of IT Resources or Capabilities
Typologies
Related studies
Physical aspect
Human aspect
Organizational aspect
Mata et al. (1995)
• Proprietary technology
• Technical IT skills
• Managerial IT skills
• Access to capital
• Customer switching costs
Ross et al. (1996)
• Technical assets
• Human assets
• Relationship assets
• IT human resources
• Business resources
Powell and Dent-Micallef
• Technology resources
(1997)
Bharadwaj et al. (1998)
• External IT linkages
• IT infrastructure
• IT business process integration
• Business IT strategic
• IT management
thinking
• IT/business partnerships
Bharadwaj (2000)
• Tangible resource
• Human IT resources
• Intangible IT-enabled resources
Tippins and Sohi (2003)
• IT objects
• IT knowledge
• IT operations
Melville et al. (2004)
• Technical IT resources
• Human IT resources
• Complementary organizational
resources
Ravichandran and
Lertwongsatien (2005)
• IT infrastructure
flexibility
• IS human capital
• IS partnership quality
Bhatt and Grover (2005) • IT infrastructure quality
• IT business
experience
• Relationship infrastructure
Pavlou and El Sawy
(2006)
• Acquisition of IT
resources
• Leveraging of IT
resources
• Deployment of IT resources
Aral and Weill (2007)
• IT assets
• IT skills
• IT management
quality (skills)
• Culture of IT use
• Digital transactions
• Internet architecture
The majority of these organizational IT resources/capabilities represents relevant issues of IT
governance in terms of planning, investment decision-making, coordination, and control (Boynton &
Zmud, 1987). These IT-native organizational capabilities are highly divergent among firms, and at the
same time, markedly different from other traditional, more business-driven forms of organizational
capabilities. In fact, one of many challenges that CIOs face is the lack of a supportive governance
structure tailored to the IT function (McKeen & Smith, 2008). This leads us to believe that IT
management capability--manifested by planning, investment decision, coordination, and control--is a
primary indicator of a firm’s organizational capabilities. Subsequently, in parallel with the taxonomy
(physical, human, organizational aspects) suggested by Barney (1991), we propose that IT
infrastructure flexibility, IT personnel expertise, and IT management capability constitute the primary
dimensions of IT capabilities.
2.2.1. IT personnel expertise and PDCs
IT personnel expertise is defined as professional skills and knowledge of technologies, technology
management, business functions, and relational (or interpersonal) areas necessary for IT staff to
undertake assigned tasks effectively (Lee, Trauth, & Farwell, 1995). Technology knowledge is the
understanding of an organization’s IT elements, including operating systems, programming
languages, database management systems, and networking; technology management knowledge is
necessary for IT resource management and includes planning, deployment, and operation; business
function knowledge is the understanding of internal business units and environments; and relational
(or interpersonal) knowledge is the IT staff’s ability to communicate and collaborate with people from
business functions.
Business operations should be able to meet emerging challenges. With IT infrastructure becoming
the backbone of business operations, IT staff should be familiar with managerial, relational, and
business issues to be able to formulate adequate IT solutions according to changing business
requirements (Rockart, Earl, & Ross, 1996; Kim, 2010). Growing such professional knowledge in an
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
492
Kim et al. / IT Capabilities & Firm Performance
IT workforce is a slow and gradual process (Mata, Fuerst, & Barney, 1995) that tends to be more
localized and particular to each organization (Sambamurthy & Zmud, 1997), and therefore, is hard
for competitors to imitate in a short time span (Bharadwaj, 2000; Mata et al., 1995).
Firms with competent IT expertise can meet competitive demands by aligning IT strategies with
business strategies, developing reliable and cost-efficient systems, and anticipating IT needs for
business services better than competitors do (Bhatt & Grover, 2005; Sambamurthy & Zmud, 1997;
Santhanam & Hartono, 2003). Firms lacking IT expertise are unable to redesign business
processes quickly when market circumstances change (Rockart et al., 1996). We, therefore,
hypothesize that IT expertise grows a firm’s capacity to reconstruct its business processes better
than market competitors can.
Hypothesis 2: A firm’s IT personnel expertise is positively associated with its PDCs.
2.2.2. IT infrastructure flexibility and PDCs
IT infrastructure refers to the composition of all IT assets (e.g., software, hardware, and data),
systems and their components, network and telecommunication facilities, and applications (Byrd &
Turner, 2000; Duncan, 1995). IT infrastructure flexibility enables IT staff to develop, diffuse, and
support various system components quickly, to react to changing business conditions and
corporate strategies such as mergers, acquisitions, strategic alliances, global partnerships, or
economic pressures (Keen, 1991; Weill, Subramani, & Broadbent, 2002). It empowers the
development of a common system that links business functions and enables their synergistic
engagement (Bharadwaj, 2000; Rochart et al., 1996). A firm with a flexible IT infrastructure can,
therefore, take better advantage of existing IT resources to exercise business strategies and
support necessary structural changes (Boar, 1996). Such IT capability becomes a valuable asset
for an organization in sustaining competitive advantages in the marketplace (Rochart et al., 1996).
In today’s business environment, where rapid changes and uncertainties have become normal,
having a flexible IT infrastructure is crucial (Rochart et al., 1996). Studies indicate that IT
infrastructure flexibility can be manifested by a firm’s (1) connectivity among intra- and interorganizational system functions; (2) compatibility, which empowers the exchange of information and
data regardless of system or technology components; and (3) modularity, in which system and
software components can be easily added, modified, and removed in the form of modules (Duncan,
1995; Keen, 1991; Byrd & Turner, 2001). Flexibility in IT infrastructure enables strategic innovations
in business processes by allowing development of necessary applications, facilitating informationsharing across business units, and making it easy to develop common systems integrating various
organizational functions (Bharadwaj, 2000; Rochart et al., 1996). Accordingly, IT infrastructure
flexibility is a source of strategic ability for a firm (Weill et al., 2002), a foundation on which better
business processes can be built. Therefore, we hypothesize that:
Hypothesis 3: A firm’s IT infrastructure flexibility is positively associated with its PDCs.
2.2.3. IT management capability and PDCs
IT management is a centrally controlled or heterogeneously distributed IT function across firms
(Bhatt & Grover, 2005; Boynton, Zmud, & Jacobs, 1994) and is manifested by the collection of IT
processes in the areas of planning, investment decision-making, coordination, and control. IT
management capability is the IT staff’s ability to manage resources in order to transform them into
business value at an organization (Peppard, 2007). It is generally reflected by the level at which
such processes are structured in formal and informal practices.
IT planning focuses on formal or informal procedures and protocols to attain stated goals as to how
IT can support or even strengthen a firm’s strategic position. IT planning structure contributes to the
formation of a shared understanding of IT values and fosters collaboration among IT people to
achieve common goals. Accordingly, an organization with effective IT planning can identify
innovative and useful IT applications, is competent at introducing and utilizing IT, manages IT
projects according to its priorities, and makes efforts to retain formalized and long-range IT
strategies (Keen, 1991; Sabherwal, 1999).
493
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
Kim et al. / IT Capabilities & Firm Performance
IT investment decision-making is grounded on the assumed value of IT in supporting or strengthening
a firm’s strategic position. Firms differ in their processes of investment decision-making; these
differences lead to discrepancies in terms of firm revenue, user system adoption, and subsequent
organizational performance (Ryan & Harrison, 2000; Ryan & Gates, 2004; Ryan, Harrison, &
Schkade, 2002). Also, having superior resource-selecting mechanisms is critical for firms to take
advantage of market resources (Makadok, 2001). With the far-reaching implications of IT investmentrelated activities for productivity, decision quality, cost management, and other aspects of business
operations and subsequent performance, investment decision-making needs to be structured through
such mechanisms as enterprise funding models (McKeen & Smith, 2008).
IT coordination represents efforts to synchronize various interactive efforts among the units of IT
management via various mechanisms, including the report system, direct contact, task forces, and
cross-functional teams (DeSanctis & Jackson, 1994). The cross-functional team is generally known to
be the most effective structural design for IT coordination. Moreover, such distinctive characteristics
as the patterns and frequency of interactions affect the ultimate effectiveness of IT coordination (Fulk
& Boyd, 1991). A firm with a strong IT coordination structure better accommodates client suggestions
and ideas, and encourages informal and formal gatherings of IT and business people to address
pending issues (Boynton et al., 1994; Karimi, Somers, & Gupta, 2001).
At organizations with a high degree of IT control, key line managers establish means to lay out IT
budgets, prioritize IT functions, control IT resource-planning, and define the roles and responsibilities
of IT staff (Karimi et al., 2001). Such firms can adequately assess proposals for IT projects, monitor
the performance of an IT organization (or department), and handle important decision making on the
development and operation of IT according to the chain of control (Boynton et al., 1994; Karimi et al.,
2001). Accordingly, firms with low IT control are expected to be weak in terms of the governance
structure (rules, procedures, and policies) designed to control IT-related activities.
As the successful implementation of business process innovations requires deployment of the right IT
to the right business process (Melville et al., 2004), firms with competent IT management are
expected to have better internal processes for agile transformation than the competition, and are,
thus, more likely to be prepared for change (Weill et al., 2002).
Hypothesis 4: A firm’s IT management capability is positively associated with its PDCs.
2.3. Interrelationships among IT Capabilities
2.3.1. IT personnel expertise and IT management capability
Organizations with competent IT staff are better at integrating IT and business planning, making
investment decisions based on anticipated business needs, engaging in effective communications
with business units, and executing systematic controls to achieve determined goals (Sambamurthy &
Zmud, 1997). In fact, one of the main duties of IT staff is to develop and reinforce IT management
capabilities by structuring various processes into adequate formal and informal practices.
IT personnel play a role in cultivating such IT management capabilities (Feldman & Pentland, 2003;
Feldman, 2000). The agency that participates in these processes must have the capability to recall
the past, project into the future, and adapt to existing circumstances as necessary. If existing
processes cannot realize intended outcomes or result in undesirable consequences, the agency will
make changes to the processes, thus advancing IT management capabilities. The course of such
changes will rely on whatever collective IT expertise the agency can mobilize. Accordingly, it is
anticipated that IT personnel with knowledge (or expertise) of technologies, IT management, business
functions, and interpersonal relationships will perform better in advancing IT management capabilities.
Hypothesis 5: A firm’s IT personnel expertise is positively associated with its IT
management capability.
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
494
Kim et al. / IT Capabilities & Firm Performance
2.3.2. IT personnel expertise and IT infrastructure flexibility
IS researchers recognize the importance of IT professionals’ contribution to the flexibility of an
organization’s IT infrastructure (Byrd & Turner, 2001). Competent IT staff are able to integrate baselevel IT resources and components into the IT infrastructure of an organization (Broadbent, Weill, &
Clair, 1999; Broadbent and Weill, 1997). IT professionals can also integrate IS components to shape
the capability of an IT infrastructure shared among various organizations (Byrd & Turner, 2001).
Through interviews with 21 CIOs and executives from Fortune 500 firms, Duncan (1995) found that a
flexible IT infrastructure is achieved by having a capable IT workforce that can balance competence in
business and IT issues. Technical expertise is crucial to effectively integrate old and new systems and
successfully assimilate new systems in an organization (Duncan, 1995; Ross et al., 1996). Also, IT
personnel with in-depth business knowledge can better comprehend business issues, project IT
implementation needs, and align IT and business strategies. Superior IT expertise is, therefore, a
prerequisite to a flexible IT infrastructure.
Hypothesis 6: A firm’s IT personnel expertise is positively associated with its IT
infrastructure flexibility.
2.3.3. IT management capability and IT infrastructure flexibility
IT management processes go hand in hand with IT personnel expertise to create a flexible IT
infrastructure (Tippins & Sohi, 2003), guiding people to deploy, coordinate, and integrate IT
infrastructure components quickly and adequately. As an IT infrastructure develops over time, IT
management processes of distributing and managing various resources, including hardware,
software, data, and networks, are formed and perfected (Ross et al., 1996), providing guidance for IT
personnel and establishing the necessary conditions for flexibility (Duncan, 1995). These processes
are crucial to blending various inputs (technological components, IT personnel, etc.) into an integrated
IT infrastructure (McKeen & Smith, 2008). Increasing IT management capability through extended
learning-by-doing experience, therefore, is important to develop a flexible IT infrastructure that
enables quick adaptation to change (Bharadwaj, 2000).
Hypothesis 7: A firm’s IT management capability is positively associated with its IT
infrastructure flexibility.
3. Research Method
3.1. Survey Development
Table 3 summarizes the operational definitions of our study constructs. All the measures, presented
on a 7-point Likert scale, were drawn from previous literature and adapted to serve the purpose of
this study. To develop the survey items, we initially generated a scale item pool from the existing
literature comprised of more than 130 question items. In order to reduce the number of items to a
manageable size, we went through several pretests. Key informants about IT capabilities, PDCs,
and financial performance can differ in their responses. Therefore, IT executives and faculty
colleagues participated in the pretest of the initial items in the survey of IT capabilities, while
business executives and faculty colleagues pretested on PDCs and financial performance. We
performed the pretest of measures for PDCs and financial performance after establishing the IT
capabilities measures.
In the case of IT capabilities, we first examined the survey items using the focus group interview. This
group consisted of three faculty colleagues who were knowledgeable about our research subject as
well as the measurement theory, and five senior IT managers with practical knowledge in IT
infrastructure. This group of people met three times within a two-week period to examine the content
validity of the research instrument. Each time they met, the participants gradually reduced the number
of items through intensive discussion. This led to a revised 50-item questionnaire that we subsequently
used for another round of pretests with 20 senior IT managers. For this round, each participant was
asked to complete the questionnaire and, during the debriefing period, to offer any suggestions for
improvement. Again, from this process, we dropped a few items and made several minor refinements of
the remaining items. The final result was a research instrument with 46 items (refer to Appendix A).
495
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
Kim et al. / IT Capabilities & Firm Performance
We then mailed this questionnaire to another group of 20 senior IT managers for a pilot test. Followup interviews with these managers indicated no need for substantive changes to the questionnaire.
For the measures of PDCs and financial performance, the process of identifying survey items was
identical to that for IT capabilities, and was performed with business executives and faculty
colleagues. Three colleagues and five business executives participated in the focus group interview;
subsequently, 10 business executives participated in both the pretest and the pilot test.
Table 3. Definitions of Study Constructs and Antecedent Variables
Constructs
Dimensions
IT personnel expertise
Definition
The level of professional skills or knowledge of IT staff
IT staff’s knowledge about technical elements, including
Technical operational systems, programming languages, database
management systems, and networking
Technology management
Business functional
Relational (interpersonal)
IT infrastructure flexibility
IT staff’s knowledge of IT resource management necessary to
support business goals
IT staff’s understanding of various business functions and business
environment
IT staff’s ability to communicate and work with people from other
business functions
The ability of a firm’s IT infrastructure to enable quick development
and support of various system components
Connectivity Ability to connect internal and external IT elements
Compatibility
Ability to share various types of information and data regardless of
technical basis
Modularity Ability to add, remove, and modify system or software components
IT management capabilities
IT planning
The ability of a firm to manage IT resources to deliver business
value
The level at which the planning of IT deployment and utilizations is
structured according to formal and informal procedures
IT investment The level at which investment decision-making about IT resources
decision-making is structured according to formal and informal procedures
The level at which coordination efforts between IT staff and
IT coordination business clients are structured according to formal and informal
procedures
The level at which IT control activities (e.g., development,
IT control management, and operation) are structured according to formal
and informal procedures
Process-oriented dynamic
capabilities
A firm’s competence to change existing business processes better
than its competitors do in terms of coordination/integration, cost
reduction, and business intelligence/learning
Perceived financial
performance
Overall financial performance over the past three years
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
496
Kim et al. / IT Capabilities & Firm Performance
3.2. Sampling and Data Collection
We collected study data through a field survey. The firms in the DART System (an electronic system
for public announcement), supervised by the Financial Supervisory Service of the Korean
Government, were adopted as a sampling frame. This system includes a mailing list of 1,835 firms,
comprising 629 firms listed on the Korea Stock Exchange, 857 firms listed on the Korea Securities
Dealers Automated Quotation (KOSDAQ), and 349 unlisted firms. From this sampling frame, we
chose a random sample of 800 firms to provide potential respondents.
To choose potential respondents, we utilized the key informant methodology in which respondents
were chosen based on their position, experience, and professional knowledge rather than by the
traditional random sampling procedure (Segars & Grover, 1999). In survey research, such key
informants, with their practical experience and organizational position, provide reliable information on
group-wise or firm characteristics that is less biased by personal attitudes or behaviors. The key
informants included such high-level executives as CIOs, directors, and senior managers. We
identified two key informants--one from an IT department (specifically, the IT strategy and IT planning
departments) and the other from a business department--from each firm as a matching response set,
curtailing the risk of common method bias. They confirmed that their organizations had a formal and
sizable IT function and agreed to respond to the survey. Non-IT persons answered survey questions
on perceived financial performance and PDS, and IT people answered those on IT capabilities.
Four weeks after the initial mailing, we sent a follow-up survey to those individuals who did not return
the completed questionnaire. Overall, 375 firms responded to the IT survey and 395 firms responded
to the business survey. The process of matching the two data sets yielded 251 pairs of complete
responses (and, therefore, a dataset of 251 firms). We dropped five IT survey responses and three
business survey responses from further consideration because they were incomplete. Thus, the final
sample consists of 243 response sets (103 firms listed on the Korea Stock Exchange, 85 firms listed
on the KOSDAQ, and 55 unlisted firms) with a joint response rate of 37.1 percent. To check for nonresponse bias, we compared the profiles of survey respondents and those on the mailing list, and of
early and late respondents, in terms of organization size and industry. The results of Chi-square tests
revealed no differences, confirming the absence of non-response bias.
The organizations in the sample represent diverse industry groups. Twenty-nine percent of the
responding firms are in manufacturing; 23.9 percent are in the telecommunication and IT industries;
17.3 percent are in the financial services, banking, and insurance industries; 14 percent are in retail; and
15.6 percent are in transportation and utilities. Except for the unlisted firms, the average number of
people employed in these firms is 4,277, and the average revenue of the firms is US$447 million. A
significant number (47.7 percent) of the respondents are either CIOs or vice presidents in the IT division.
The job titles of the other respondents (senior vice president, vice president of technology, assistant vice
president, director of information technology) indicate that they are also senior IT executives. In addition,
50.6 percent of respondents who answered the questions on organizational performance are at the rank
of senior vice president, vice president, assistant vice president, or director. All respondents indicated
that they are within two levels of the highest position in their organizational hierarchy.
3.3. Construct Validity
Reliability verification of the measurement models was done through confirmatory factor analysis
(CFA) using LISREL. Before conducting the analysis, we checked two important assumptions
underlying CFA: multivariate normality and model identification (Segars & Grover, 1999). The
multivariate normality test conducted on the PRELIS function of LISREL revealed a departure of the
survey data from multivariate normality. We, therefore, utilized normalized scores to fit the research
model to the data set, as suggested by Jöreskog, Sörbom, Du Toit, and Du Toit (2001). After the
scores had been normalized, a simple test using LISREL found no model identification problem.
In the initial examination of the measurement models, we deleted only one item (MD4) of the
modularity variable due to lack of reliability. Then we conducted a series of empirical tests, as
recommended by Spanos and Lioukas (2001), to examine the construct validity (e.g., unidimensionality, reliability, and convergent and discriminant validity) of our first-order indicators. As
497
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
Kim et al. / IT Capabilities & Firm Performance
shown in Appendix B, the first-order indicators achieved a satisfying level of construct validity. We
assessed discriminant validity among the three second-order IT capabilities with the Chi-square
difference test (Venkatraman, 1989). The results demonstrated that the three second-order
constructs are statistically distinct concepts at the significance level of 0.00001 (see Appendix C).
4. Analysis Results
The research model was intended to examine relationships among the studied variables. Among
the variables, IT capabilities (IT personnel expertise, IT management capabilities, and IT
infrastructure flexibility) are manifested by lower-order conceptual dimensions and accordingly
positioned as second-order constructs in our research. In addition, perceived financial performance
might be affected by such business factors as industry type and firm size; therefore, they are
utilized as control variables. Industries were classified into manufacturing and non-manufacturing
types, and firm size was divided into five categories (100, 300, 500, 1000, and 3000) in terms of the
number of employees.
Figure 2 summarizes the estimation of path coefficients and subsequent results of hypothesis
testing. Path coefficients indicate that IT personnel expertise strongly affects IT management
capabilities (β= 0.91, t = 10.01, p < 0.01), but its influence on IT infrastructure flexibility is not
substantiated. However, we observe a significant influence of IT management capabilities in
enhancing IT infrastructure flexibility (β= 0.70, t = 3.41, p < 0.05). Both IT personnel expertise (β=
0.48, t = 2.24, p < 0.05) and IT infrastructure flexibility (β= 0.37, t = 2.21, p < 0.05) exhibit
considerable influence on growing PDCs. We do not see a direct effect of IT management
capabilities on PDCs. Finally, the level of PDCs is positively associated with perceived financial
performance (β= 0.35, t = 5.25, p < 0.01).
Planning
Investment
Coordination
R2=0.83
IT
Management
Capabilities
-0.21
(-0.82)
Control
0.70*
(3.41)
0.11
(1.81)
Connectivity
Compatibility
0.91**
(10.01)
IT Infrastructure
Flexibility
Modularity
R2=0.71
0.48*
(2.24)
Technical
Business
0.37*
(2.21)
0.35**
(5.25)
PDCs
Firm
Performance
R2=0.38
R2=0.21
0.27**
(4.46)
0.15
(0.78)
Tech. Mgt.
Firm Size
Industry
IT Personnel
Expertise
significant
insignificant
Relational
Note: *P < 0.05, **P < 0.01
Figure 2. Analysis Results
Journal of the Association for Information Systems Vol. 12 Issue 7 pp. 487-517 July 2011
498
Kim et al. / IT Capabilities & Firm Performance
Figure 3 shows a version of the model in which we add direct paths from the three different types of
IT capabilities to firm performance to Figure 2 to test whether IT capabilities have both direct and
indirect influences on firm performance. We observe no statistically significant relationship for the
direct paths. This confirms the integrity of the proposed model in Figure 2, in which PDCs fully
mediate the contribution of IT capabilities to firm performance.
Planning
Investment
Coordination
R2=0.83
IT
Management
Capabilities
0.42
(1.56)
-0.23
(-0.89)
Control
0.70**
(3.42)
Connectivity
Compatibility
0.91**
(9.98)
0.37*
IT Infrastructure (2.20)
Flexibility
0.09
(1.56)
0.31*
(3.48)
PDCs
Financial
Performance
R2=0.38
R2=0.71
R2=0.23
0.27**
(4.42)
0.49*
(2.30)
Technical
Business
0.42
(0.01)
Modularity
0.15
(0.80)
Tech. Mgt.
Firm Size
-1.41
(-0.32)
Industry
IT Personnel
Expertise
Relational
significant
insignificant
Note: *P < 0.05, **P < 0.01
Figure 3. Additional Analysis
5. Discussion
We frame the discussion of data analysis in this section in terms of two main research contributions:
(1) uncovering the indirect role of IT capabilities on a firm’s financial performance through the
augmentation of PDCs, and (2) understanding the internal dynamics among IT capabilities.
5.1. IT Capabilities and Firm Performance
We examined the process in which ...
Purchase answer to see full
attachment