IT Strategic Emphasis Moderates the Relationship between IT Investments and Firm Performance - Assignment Example

Managing Information Systems Q1. Why are the authors studying information technology strategy and investments to influence firms’ performance? (3 Marks) There are three main reasons as to why the authors study the impact of IT investment and strategy on the performance of firms. First, it is observed that studies that have been conducted on the general subject of IT and the performance of firms have on one hand identified specific relationships between IT and performance in general but failed to investigate specific issues of importance on the other hand (Mithas & Rust, 2016, p. 223). For example, it is noted that whereas there are very many studies that attempt to link the effect of IT on the performance of firms, very few studies address the direct relationship between the amount of resources that firms spend on IT and the strategies that they develop on their performance (Mithas & Rust, 2016, p. 223). In the same vein, Laudon and Laudon (2016, p. 233) observe that deciding on the amount of money that companies invest in IT is one of the most important decisions that company managers make. In this case, the study by Mithas and Rust (2016) seeks to address this issue by examining how the strategies that companies use for their IT activities and the resources that the companies spend on IT operations affect their performance. The second reason is related to what the authors describe as a direct relationship between IT investment and the performance of firms. It is noted that firms spend a lot of money on IT yet fail to develop strategies that they can effectively use to gain value from their heavy investments in IT (Mithas & Rust, 2016, p. 223). Interestingly, it is noted that that firms can approach the issue of strategic focus on their IT resources in three main ways (Mithas & Rust, 2016, p. 223). In the first way, firms can tie their IT investments to their overall strategy of reducing their costs of operation (Mithas & Rust, 2016, p. 224). In this case, IT can be used to increase productivity and help companies cut down on their costs. As well, firms can tie their investments in IT to their specific objective of increasing revenue (Mithas & Rust, 2016, p. 224). In this case, firms can use IT to access new opportunities and make more money. Additionally, firms can combine the objectives of reducing costs and increasing revenue when investing in IT (Mithas & Rust, 2016, p. 224). Therefore, the authors examine how these three approaches influence the performance of firms. Q2. Describe why the authors claim that IT strategic emphasis moderates the relationship between IT investments and firm performance (page 226). (6 Marks) There are three reasons as to why the authors claim that IT strategic emphasis moderates the relationship between IT investments and firm performance. These reasons, which are based on the observation that IT forms the basis upon which firms develop and execute their strategies, are outlined as follows. First, it is argued that IT strategic emphasis modifies the relationship between IT investments and firm performance in terms of the impact of dual strategy on the performance of firms (Mithas & Rust, 2016, p. 226). When firms pursue an IT strategy which is based on the need to reduce costs on one hand and to increase revenue on the other, they tend to perform better in terms of profitability and market value (Mithas & Rust, 2016, p. 226). The authors argue that the tendency for firms to perform better if they develop and pursue an IT-related strategy which is based on the two objectives of cutting costs and increasing revenue is founded on the theory of the resource based view (RBV) of the firm (2016, p. 226). Under the RBV theory, firms are said to have resources and capabilities which they can use to develop a sustainable competitive advantage (Grant, 2016, p. 130). When firms use their unique capabilities, they can develop a competitive advantage which helps them to perform better than their competitors in the market (Talaja, 2012, p. 55). The hallmark of the RBV of the firm is that under it, companies can use their resources which are valuable, rare, inimitable, and embedded in the organisational activities of the company (Witcher & Chau, 2010, p. 126). In this case, it is argued that when companies invest in IT strategies which are focused on cutting costs and increasing revenue, they manage to develop unique capabilities using their resources (Mithas & Rust, 2016, p. 227). The result of this approach is that the companies are able to get the benefits associated with firms having access to resources and capabilities which are valuable, rare, inimitable, and embedded in organisational activities. The second reason as to why the manner in which firms emphasise on their IT strategies affects the relationship between IT investment and the performance of the firms is based on the impact of IT strategy on the revenue-making opportunities that become available to the firm. It is argued that the IT strategy that a firm pursues has a direct relationship on the extent to which the firm gets opportunities to generate more revenue (Mithas & Rust, 2016, p. 227). When firms use an IT strategy that emphasises on either cutting down their costs of operations or increasing the amount of revenue, they fail to benefit from the effect of using a strategy that is based on achieving both goals concurrently. Hence, firms which use an IT strategy that seeks to add revenue and increase costs tend to perform better because the approach helps them to take advantage of opportunities to make money which are available in the form of cost-cutting measures and revenue-generating streams (Mithas & Rust, 2016, p. 228). The third reason as to why emphasis on IT strategy moderates the relationship between investments in IT and the way firms perform is related to the manner in which the strategies that companies pursue in relation to their IT activities has a direct impact on the goal setting process. It is argued in the article that how companies set and pursue their goals is directly related to whether they pursue an IT strategy which is based on either the need to cut down the costs of operation or to increase the sources of revenue (Mithas & Rust, 2016, p. 227). When companies pursue an IT strategy that is based on the objectives of cutting down costs while increasing revenue at the same time, they tend to perform better (Mithas & Rust, 2016, p. 228). The better financial and value-based performance of firms that pursue such a dual strategy arises from the manner in which such a strategy helps the firms to set very challenging targets. Q3. Discuss the main findings of the study (page 234). (6 Marks) The findings of the study are based on the main question, which was to determine why the use of a strategic emphasis on IT strategy that focuses on reducing costs, increasing revenue or addressing the two goals simultaneously will have an impact on the performance of the firm and affect the way that the firms invest in IT. The study finds that firms which pursue an IT strategy which is based on the need to simultaneously reduce operational costs and increase revenue sources tend to perform better in terms of market valuation than those firms which pursue a strategy that is focused on either reducing costs or increasing revenue (Mithas & Rust, 2016, p. 234). Three reasons are advanced to explain this finding (2016, p. 237). The first one is that markets tend to reward companies which pursue IT strategies that seek to reduce costs and increase revenue at the same time because markets believe that firms which use such strategies develop resources and capabilities that give the firms a competitive advantage. Therefore, when firms use a dual-objective strategy, they are viewed positively by the market since the market considers that such firms use strategies which are very valuable, rare, cannot be easily replicated by competing firms and help the organisations develop internally. Another reason why firms that pursue cost-cutting and revenue-generating goals in their strategies tend to be rewarded by the market is that such firms usually have access to ways of increasing their value by generating cash from cost reduction as well as revenue generation measures. Therefore, firms that pursue both objectives in their IT strategies are viewed positively by the market because of their ability to take advantage of opportunities to reduce costs as well as earn more revenue very easily as compared to those firms that only focus on a single objective in their strategic emphasis. Third, the better market performance of firms which seek to reduce costs and generate revenue in their IT strategies is viewed favourably by markets because such firms have the ability to set very challenging goals (Mithas & Rust, 2016, p. 237). The challenging goals tend to accelerate their growth and development as compared to those firms which only focus on a single objective in their emphasis on IT strategy. The second main finding of the study is related to the manner in which strategic emphasis influences the relationship between firm performance and the investments that firms make in IT. It is found that the strategic emphasis that firms use has a profound effect on the relationship between the performance of the firms and the manner in which the firms invest in IT (Mithas & Rust, 2016, p. 237). This happens in several ways. For example, the study finds that firms which seek to simultaneously increase their revenue and cut down the costs of operation tend to have a stronger IT-profitability relationship than those firms which only seek to reduce costs or simply increase revenue (Mithas & Rust, 2016, p. 238). What this finding implies is that when firms use the dual-objective IT strategy, the investments that they make in their IT activities tend to be more profitable than it is the case when firms only pursue a single-objective strategy. References Grant, R. M. (2016). Contemporary strategy analysis: Texts and cases. Mason: John Wiley & Sons. Laudon, K.C., & Laudon, J. P. (2016). Management information systems: Managing the digital firm. Sydney: Pearson. Mithas, S., & Rust, R. T. (2016). How information technology strategy and investments influence firm performance: Conjecture and empirical evidence. MIS Quarterly, 40(1), 223-245. Talaja, A. (2012). Testing VRIN framework: Resource value and rareness as sources of competitive advantage and above average performance. Management, 17(2), 51-64. Witcher, B. J., & Chau, V. S. (2010). Strategic management: Principles and practice. Mason: Cengage. Read More