Information Technology and Firm Profitability - Team Topaz

INFORMATION TECHNOLOGY AND FIRM PROFITABILITYINFORMATION TECHNOLOGY AND FIRM PROFITABILITY

Team TopazTeam Topaz

Revenue-Generating IT Projects

Cost-Saving IT Projects

IT Expenditures vs. Advertising and R&D

Research Method

1

2

3

4

IntroductionIntroduction

Question and Answer Session5

Purpose of PaperPurpose of Paper

• Answer three questions:– Do IT investments affect firm

profitability?– How do IT-enabled revenue

growth and IT-enabled cost reduction compare in terms of their relative impact on firm profitability?

– How does the effect of IT on profitability compare with that of advertising and of research and development?

“Senior Managers should give higher priority to revenue-enhancing IT

projects for superior firm performance.”

Revenue-Generating IT ProjectsRevenue-Generating IT Projects

• IT Investments generate IT growth through in three ways:– New value propositions– New marketing and

sales channels– Improved management

of the customer life cycle

New Value PropositionsNew Value Propositions

• Customer Relationship Management Applications

• Better understanding of unfulfilled and evolving customer needs

• Capturing and making use of customer knowledge for better design, demand forecasts, manufacturing, delivery, cross-selling opportunities, and fulfillment

Example of New Value Proposition (Amazon.com)Example of New Value Proposition (Amazon.com)

New Marketing and Sales ChannelsNew Marketing and Sales Channels

• IT systems allow firms to target customers through IT-enabled channels such as:– E-mail– Short messaging

systems– Websites– Targeted databases

Improved Management of Customer Life CycleImproved Management of Customer Life Cycle

• Increased contact and closing rates

• Improved customer retention, customer knowledge, and customer satisfaction

• higher customer satisfaction leads to higher loyalty and willingness to pay

“Because revenue-generating projects are more difficult for competitors to replicate, firms are

more likely to differentiate themselves and find a niche based on revenue-generating IT

capabilities than on cost-saving IT capabilities.”

Sustainable Competitive AdvantageSustainable Competitive Advantage

• Revenue-Generating IT Projects lead to sustainable competitive advantage

• Examples:– More firm specific because

they align with downstream or customer facing processes

– databases of customer profiles and transactions

– Reconfiguration of business processes

– Critical information about revenue-enhancing IT projects is rarely publicly available

– Likely to have stronger and more enduring effects on competitive position than cost-saving IT projects

Examples of Revenue-Generating IT UsesExamples of Revenue-Generating IT Uses

• Dell– Makes use of IT social media

to engage employees and customers (IdeaStorm and EmployeeStorm)

– Embedded feedback into business processes and improve its customer resource life-cycle management

• Southwest– created an integrated system

to form extensive links among customers, employees, and other airlines

“Firms reap greater profitability gains from revenue-enhancing IT projects than from cost-saving IT projects.”

Cost-Saving IT ProjectsCost-Saving IT Projects

• Reduce or avoid:– Operational costs– General and

Administrative Costs

– Customer Acquisition and Marketing Costs

Reducing or Avoiding Operating CostsReducing or Avoiding Operating Costs

• Improved efficiency of operational and supply chain processes by supporting lean transformational efforts

• Higher productivity and a reduction in inventory and cycle times

• Better information sharing and tighter coordination in supply chain relationships

YOUR NAME HERE

Reducing or Avoiding General and Administrative CostsReducing or Avoiding General and Administrative Costs

• Lowers employee and customer support costs through the implementation of self-service technologies

• Facilitate sales and related transactions, such as ordering, payment, and exchange through which customers can transact and get support without human intervention

• Allow customers to perform certain tasks on their own (e.g., entering data about their orders), thus reducing labor costs and freeing time to plan and optimize other costs

Reducing or Avoiding Marketing CostsReducing or Avoiding Marketing Costs

• The cost of sending messages through electronic media such as e-mail, short messaging systems, and social media is a fraction of the cost of traditional advertising channels (e.g., television, direct face-to-face marketing)

• Internet-based applications, websites, click-stream data, and user profiling technologies make the costs of capturing, maintaining, and integrating different sources of information to target consumers comparatively lower

Walmart’s Use of IT to Reduce CostsWalmart’s Use of IT to Reduce Costs

• Investing in the RetailLink system enabled Wal-Mart to be tightly linked with its vendors, providing them with frequent, timely, and store-specific sales information

• This information system has led to quick turnaround times for Wal-Mart and has driven labor and inventory costs down

Key Differences Between Revenue-Generating and Cost-Saving ProjectsKey Differences Between Revenue-Generating and Cost-Saving Projects

Revenue-Generating IT Projects

Cost-Saving IT Projects

Part of organization most effected

Customer-facing operations In-house firm operations

Effect on Firm Profitability Much greater May be much smaller

Reconfiguration of Business Processes

Can be a profound change May be minimal

Ease of Replication from Competitors

More difficult to replicate Much easier to replicate

Specificity of projects Firm-SpecificLess Firm-Specific (automation tools purchased from vendors, etc.)

“Revenue-enhancing IT projects have a more pronounced effect on

profitability than advertising and R&D.”

IT Expenditures vs. AdvertisingIT Expenditures vs. Advertising

• Can help firms reach customers more effectively and at less cost

• IT investments can influence business processes that encompass both digital and non-digital channels of communication

• Can allow a firm to engage a wider range of stakeholders

• Difficult for competitors to imitate

Vanguard Example of IT ExpendituresVanguard Example of IT Expenditures

• Focus on Internet related technologies to forge ties with clients

• Over the years, Vanguard’s IT investments portfolio has expanded to include:

– Live webcasts– Chats– Blogs– iPhone applications

• Grew its assets from $580 billion to $1.4 trillion, much of which has been driven by IT investments

IT Expenditures vs. Research & DevelopmentIT Expenditures vs. Research & Development

• Even in the most intensive R&D industries such as the pharmaceutical and biotechnology industries, IT investments play a critical role in revenue generation

• Wyeth example (recently acquired by Pfizer)

– invested significantly in IT to support its R&D

– These investments enabled virtual teams from different business units around the world to collaborate in research and to develop new drugs

Relative Effects on Profitability (Fixed Effect Models)Relative Effects on Profitability (Fixed Effect Models)

Effect on Profitability

IT1.912

(0.603)

R&D1.001

(0.083)

Advertising.155

(0.287)

Observations 276

Number of Firms

86

Research MethodResearch Method

• Used a large sample of more than 400 global firms over a period of six years (1998–2003) to test the conceptual model

• Conduct an empirical investigation using archival data collected by one of the largest international research firms well known for its IT data and research services

• The research firm collected firm-level IT investment data, along with other IT investment-related information, as part of its annual worldwide IT benchmarking survey

Limitations of Research MethodLimitations of Research Method• The study uses data on large

global firms, which limits the generalizability of the findings

• Study was only conducted at the firm level; there is still a need to conduct such an analysis at the business unit level and project level

• There remains a need to verify the generalizability of the findings in other contexts and time periods (there was a Stock Market boom and bust between 1998 and 2003)

• While the study suggests that the effect of IT on profitability is mediated through sales growth, we cannot pinpoint whether the sales growth is because of higher volumes or higher margins

Question and Answer SessionQuestion and Answer Session

1. Who are the authors?  (Not just names)

2. What is the stated purpose of the article?

3. Who is the audience?

4. Does the literature review seem reasonable?  Does it encompass enough literature?

5. Does the article structure make sense?

6. Were the authors successful in accomplishing their stated purpose?

7. Does this mean anything at all to you?  Is this article worthless to practitioners?  Why?  If it does have value? What is it and why?

Who are the Authors?Who are the Authors?

Sunil Mithas•Associate Professor in Decision, Operations and Information Technologies Department.•Robert H. Smith School of Business at University of Maryland•Earned Ph.D. at the Ross School of Business at University of Michigan

Ali Tafti•Assistant Professor of Business Administration•College of Business, University of Illinois•Earned Ph.D. in Business Administration at University of Michigan

Who are the Authors? (cont.)Who are the Authors? (cont.)

Indranil Bardhan•Associate Professor of Information Systems and Operations Management•Naveen Jindal School of Management, University of Texas at Dallas•Earned Ph.D. in Management Science and Information Systems from the McCombs School of Business at the University of Texas at Austin

Jie Mein Goh•Professor of Information Systems and Information Technology & Innovation•IE Business School in Madrid, Spain•Earned Ph.D. at University of Maryland College Park

Question and Answer Session (cont.)Question and Answer Session (cont.)

2. Who is the audience?

3. Does the literature review seem reasonable?  Does it encompass enough literature?

4. Does the article structure make sense?

5. What is the stated purpose of the article?

6. Were the authors successful in accomplishing their stated purpose?

7. Does this mean anything at all to you?  Is this article worthless to practitioners?  Why?  If it does have value? What is it and why?

What is the Stated Purpose in this Article?What is the Stated Purpose in this Article?

“The goal in this study was to examine the effect of IT investments on profitability and

the extent to which the effect of IT on profitability is mediated through revenue

growth and cost reduction.”

Does this Article Have Value and Why?Does this Article Have Value and Why?

SummarySummary• Senior Managers should give

higher priority to revenue-enhancing IT projects for superior firm performance

• Because revenue-generating projects are more difficult for competitors to replicate, firms are more likely to differentiate themselves and find a niche based on revenue-generating IT capabilities than on cost-saving IT capabilities

• Firms reap greater profitability gains from revenue-enhancing IT projects than from cost-saving IT projects.

• Revenue-enhancing IT projects have a more pronounced effect on profitability than advertising and R&D.