The complex contribution of information technology capability to business performance

Annual spending on information technology capability--specifically on computer hardware, software, and related devices--will increase to $1.2 trillion by 2008, representing the single largest capital investment by businesses (International Data Corporation, 2005). Information technology (IT) capability is the ability of a computer system to store, process, and communicate information (Bakos and Treacy, 1986). The sizable and growing spending on IT capability has managers asking what contribution information systems make to business performance. One answer is not much. In an attention-grabbing Harvard Business Review article, Carr (2003) argues that computers confer no meaningful gains due to their ubiquity and commodity nature. Other experts disagree. Broadbent and her colleagues (2003) point out that IT systems enable firms to increase work efficiencies, exploit market opportunities, and strengthen the financial bottom-line. The debate reminds us that, despite the wide acceptance of computers, the contribution of IT capability to business performance--known as the IT business value issue--is not entirely settled. There are two emerging insights to help resolve this important managerial concern, insights that suggest a complex relationship. The first insight is that IT capability contributes to business performance, but the path may be indirect rather than direct. Studies examining the direct path have yielded mixed results: some studies have found IT to have positive effects on performance, some have found negative effects, and others have found no effects (Brynjolfsson and Hitt, 2000; Dedrick et al., 2003). Consequently, the path has been proposed as indirect--IT capability perhaps facilitates critical organizational activities, which in turn augments business performance (Chan, 2000; Melville et al., 2004). A few empirical studies have been conducted on this alternate route, with promising findings. The positive influences of IT capability on business performance have been demonstrated as mediated by resource utilization and inventory turnover (Barua et al., 1995), loan origination and mortgage handling (Lee, 2001), supplier and customer side digitization (Barua et al., 2004), and cross-unit knowledge management (Tanriverdi, 2005). The second insight is that the impact of IT capability may be socially contingent. Studies suggest that a strong IT capability is a necessary but insufficient condition for organizational effectiveness (Davenport, 1994; Orlikowski, 1992). A particular IT capability cannot on its own produce work efficiencies, cost savings, and sales growth because people in the organization ultimately determine the design and use of that system to achieve collective ends. When social factors such as human resources and organizational climate are favorable, the benefits of IT capability are recognized, supported, and sought in the organization; when unfavorable, the capability is apt to be ignored, underused, and even misused (Brown and Starkey, 1994). Following on these insights, we conduct a study aimed at examining a more complex set of relationships between IT capability and business performance. Specifically, we propose studying one mediator and two moderators in the IT capability-business performance relationship. The mediator we consider is customer orientation, which is the firm-level ability to identify, analyze, understand, and meet customer needs (Deshpande et al., 1993; Gatignon and Xuereb, 1997). We focus on customer orientation because it has long been held to be a primary determinant of business performance (Day, 2003; Narver and Slater, 1990). Drucker (1954) espoused the view that knowing and satisfying customers is the surest route to market and financial success. Researchers in marketing have speculated that customer orientation is strengthened by IT capability. Computer technologies such as datamining software seem to assist in rapid, comprehensive, and accurate understanding of and reactions to changing buyer needs (Day, 1994; Shugan, 2004; Varadarajan and Yadav, 2002). …