Does Electronic Business Create Value for Firms? an Organizational Innovation Perspective

ABSTRACT This study applies organizational innovation theory to one specific type of innovation-electronic business. It describes e-business innovation along seven dimensions: organizational focus, radicalness, centrality, adaptability, uncertainty, pervasiveness, and communicability. E-business is identified as both an administrative and technical innovation that is flexible, has median centrality, high levels of radicalness, uncertainty, pervasiveness, and communicability. The study also links innovative use of e-business to firm performance. By analyzing data from InformationWeek and the Compustat database, the study shows significant differences between the performance of e-business innovative firms versus the performance averages for their respective industries. The identification of ebusiness innovation attributes and the linkage between innovation and performance assists researchers in building e-business theories. The study also provides managers a basis for choosing the appropriate level of involvement in e-business. Keywords: Innovation; electronic business; firm performance 1. Introduction The purpose of this study is to understand the role of e-business innovation in firm performance. It follows the lead of previous researchers on organizational innovation who suggests that it's more important to understand how innovation theory can explain one particular innovation instead of searching for a single unifying theory that could explain all innovations in general [Wolfe, 1994; Swanson, 1994; Damsgaard and Lyytinen, 1997]. Accordingly, the current research applies organizational innovation theory to a specific type of innovation-electronic business-so that, first, the unique attributes of e-business innovation can be identified. This study then examines the attributes of e-business innovation and how they affect business success by linking early adoption and innovative use of ebusiness to firm performance. The first research issue-understanding the important attributes of e-business innovation-is valuable for both researchers and managers. Researchers report that innovation in general is critical to firm competitiveness and effectiveness [Wolfe, 1994] and, yet, any systematic study of e-business as an innovation is absent. Because ebusiness has been one of the most, if not the single most pervasive innovations for businesses in recent years, researchers want to know where e-business fits into the overall innovation classification in terms of its attributes [Wolfe, 1994]. Such a classification provides guidance to future researchers by laying a common ground for comparing findings and organizing the accumulation of knowledge of e-business [Wolfe, 1994]. Managers want to understand e-business innovation attributes so that they can adjust their organizational process to facilitate ebusiness innovation and enhance firm performance [Zmud, 1984; Kettinger and Hackbarth, 2004]. The second issue of this study-understanding whether early adoption and innovative use of e-business contributes to firm performance-is also valuable for researchers and managers. However, two shortcomings of previous researches limit their value for e-business application. One drawback in studies of general innovation is the focus on antecedents of an organization's tendency to innovate (the dependent variable is typically organizational innovativeness), rather than studying the results of innovativeness [Wolfe, 1994]. Another shortcoming is a focus on e-commerce in general, rather than e-business, specifically [Lewis and Cockrill, 2002, Wang and Tsai, 2002]. E-business is defined in this study as "a broader definition of EC, not just the buying and selling of goods and services, but also servicing customers, collaborating with business partners, conducting e-learning, and conducting electronic transactions within an organization." [Turban et al., 2004, p. 3]. Furthermore, while e-commerce studies address the factors that predict such adoptions, little is known about the effects of e-business adoption on firm performance. …