IS THE 'ABILITY TO SUSTAIN IT INNOVATION' AN OXYMORON?
By
Theophanis C. Stratopoulos Assistant Professor of Information Systems School of Accountancy University of Waterloo
[email protected]
And Jee-Hae Lim Assistant Professor of Accounting School of Accountancy University of Waterloo
[email protected]
Abstract: Management’s perception towards the competitive contribution potential of innovation with IT (ITI) can be likened to a roller coaster ride. Managers’ confidence with IT rises some times only to fall later. Such an observation might have us believe that companies do not take a long-term and systematic approach to innovation with IT, because a firms’ capability to innovate with IT is easily replicated. In this paper we followed the IT confidence cycles from the early 80s to today. By concentrating in the most recent cycle, late nineties to 2004, we developed and tested the following proposition: The development of the capability to be innovative with IT is a cumulative and path dependent process. In other words, it depends on prior choices that the firm has made; it requires the appropriate culture and management support in order to nurture it. Hence, companies that have developed an ITI capability and attained an ITI status among their competitors are likely to maintain their status over time. Our results, based on cross-sectional data of large US firms that have attained the ITI status, seem to strongly support our position.
INTRODUCTION The publication of a recent article on innovation in Harvard Business Review1 reminded us that while organizational innovation has been a perennial favourite topic of managers; perception regarding the strategic role of innovation with Information Technology (IT) resembles a roller coaster ride. At times the importance of IT innovation is maximized, while at others it has been minimized. This perception implies that companies do not, and should not, take a long-term and systematic approach to innovation with IT. If they did, their ability to sustain IT innovation among their competitors would be short lived, since a firm’s ability to innovate with IT is easily replicated. Our objective is to show that, in spite of the fact that the perception towards IT has been changing over time, it is possible to have a long-term strategic approach towards innovation. The ability to innovate with IT is sustainable. In order to support our view we started reviewing IT related stories from major newspapers and magazines from the early eighties to today. We evaluated these stories for reference indicating managers’ perception towards the strategic potential of investment in new IT and we used these references to create an implicit IT Confidence Index (ITCI). According to our ITCI – figure 1 – the most recent cycle runs from the late 90s till around 2004. We concentrated in this period and we analyzed the sustainability of IT innovation among a group of large US firms and their top competitors. Our results indicate that the probability that a firm will sustain its IT innovator status over time is
1
Kanter, R.M. (2006). Innovation: The Classic Traps. Harvard Business Review, 84(11), 73-83.
2
high and the probability that non-IT innovative firms will be able to become innovative within a few years is relatively low. THE IT CONFIDENCE INDEX2 Reading news stories from the early to mid eighties, we found that the prevailing perception was that companies could gain a competitive advantage by pursuing and adopting emerging IT-based products and services throughout the organization. This perception was fuelled by the highly publicizes success stories of firms like Mrs. Fields, Figure 1 - IT Confidence Index From Early 80’s to Today
McKesson’s and SABRE. For example, a 9/16/1985 Wall Street Journal article described how large retail chains were making strategic use of computers in their drive for competitive advantage. The same year, Industry Week (10/28/1985) was criticizing British CEOs for neglecting the importance of IT and failing to recognize the competitive 2
The ITCI in figure 1 is a free hand interpretation of manager’s perception towards IT as this was captured in newspaper stories.
3
advantage it provides. These examples from our review indicate that the ITCI was relatively high at this time. By the late eighties the stories started to lose their optimism, and the confidence level was on a downward ride. In a book review in the Washington Post (2/1/1987), M. Schrage wrote that the corporate America was in the ‘throes of self-doubt and angst about the economic value’ of investments in new IT. The Financial Times (11/4/1987) reported that managers, who had made massive investment in new IT in order to gain competitive edge over their competitors, were now wrestling with the problem of justifying these investments. At the same time, Industry Week (3/21/1988) reported that the CEO of a billion-dollar company confided that he was confused and disappointed by the lack of impact of IT on his organization. Solow’s statement regarding the IT Productivity Paradox and a couple of academic studies added more fuel to these negative feelings as the ITCI continued its downward ride in the beginning of the nineties. 3 The Financial Times (11/27/1990) reported that opinion surveys among top executives made the IT investment paradox painfully clear and the Wall Street Journal (11/11/1991) announced that two new economic studies provided fresh evidence that, contrary to expectations, investments in IT did not increase productivity. The New York Times (4/25/1993) concluded that CEOs were more knowledgeable about IT now and, as a result,; they were becoming more demanding and less forgiving.
3
Robert Solow said that ‘you can see the computer age everywhere but in the productivity statistics,” in an article with title “We’d Better Watch Out,” that was published in the New York Times Book Review in July 12, 1987. The first academic study was by Loveman, G., “An assessment of the productivity impact on information technologies. MIT Management in the 1990s,” working paper #88-054, July, 1988. The second one was by C.J. Morrison, E.R. Berndt “Assessing the Productivity of Information Technology Equipment in U.S. Manufacturing Industries,” NBER Working Paper No. 3582, January 1991.
4
With the introduction of the Internet in the mind-nineties, attitudes were changing again and confidence in the role of IT started rising, slowly at first and then very quickly. A Minneapolis Star Tribune story (12/5/1994) explained how computers and high tech satellite location systems helped truckers save time, fuel and money. A year later a writer in The Banker (2/1/1995) described how the financial industry was transformed by IT and how banks were leading the way. In the same year, a headline in the Financial Times (10/4/95) proclaimed that the revolution continued. The story described how large retail chains were using data mining and its potential as a key to a competitive advantage. This ITCI took off around 1997.The Financial Times (1/8/1997) reported results from a business survey showing that the theme ‘using IT for competitive advantage’ had shot from the 13th to the 4th slot. It continued by stating that the IT and business community were ‘waking up’ to the realization that IT could change the way business was done. The story closed with the observation that the Internet had become the number one key for gaining competitive advantage. These and other similar reports seem to point out that the ITCI reached its highest level in the late 1990’s. By the beginning of 2000 the proverbial ride had reached its apex and the first signs of the forthcoming fall were evident. The Financial Times (3/31/2000) wrote that IT investment was causing discontent in corporate boardrooms. This sentiment was based on their survey of managers from 505 top global companies. The results showed that 28% of them were unhappy. The bursting of the dot com bubble sent the IT perception into a tailspin. To paraphrase a quote from Blade Runner, the candle that had burned twice as bright left us in the darkness twice as fast. In 2003, an article by N. Carr with the catchy
5
title “IT Doesn’t Matter” perfectly captured the prevailing attitude towards IT.4 The confidence index was its lowest point. By 2004 signs of cautious optimism were evident in the press. An article in CIO Magazine (10/1/2004) provided the view from a CIO’s standpoint ‘… The CEO is pushing you for new systems that create competitive advantage. The CFO is pulling you to cut costs. How to strike a balance without being torn apart.’ A survey published in the Economist (4/7/2005) reported that 90% of managers from around the world thought that IT could still create a competitive advantage for their firm. The article closed with the prediction that corporate IT budgets would rise again. In the 2006 results of the IDC's Line-of-Business Executive Survey, it was reported that innovation was the in the No.2 spot in rising priorities for CEOs, with IT innovation at No. 4 5. The IT Confidence Index was gradually rising again. IMPLICATION FOR IT INNOVATION STRATEGY The main criticism against innovation with IT is that it is not likely to lead to a sustainable competitive advantage because it is easily replicated. The logic is that the apparent success of innovators motivates the imitating behavior of their competitors. If ITI is replicated with relative ease one might have expected that a company’s ability to be innovative with IT year after year would be an unlikely phenomenon and an irrational business practice. Companies would have no incentive to systematically devote precious resources in the development of a capability that it is not likely to lead to significant and sustainable competitive payoffs.
4
Carr, N. (2003) “IT Doesn’t Matter,” Harvard Business Review, May 2003
5
Gens 2006). “Product Innovation and Improving IT Are Rising As CEO Priorities in 2006” http://blogs.idc.com/ie/?p=44
6
Our objective will be to show that this is not true; companies like Wal-Mart, Intel, Procter and Gamble, FedEx, Harrah’s, and Schneider National, to name a few, have been taking a long-term and strategic approach towards innovation with IT. These firms tend to stay on their IT innovator course regardless of the level of the IT Confidence Index6. A company’s ability to be innovative with IT depends on its IT absorption capacity capability. This is a path-dependent capability that is not easily replicated because it requires several consecutive steps: the firm must continuously scan the external environment for emerging IT-based products and services, it must understand which one them could support the company’s strategy, it must adopt them throughout the organization, and it must do this in a way that increases the company’s efficiency and effectiveness.7 Wal-Mart epitomizes this; the company was one of the first retailers to foresee the benefits of collaborative planning, forecasting and replenishment (CPFR), an inventory management initiative in1995. Wal-Mart collaborated with Warner-Lambert and Sara Lee using CPFR. This e-collaboration with Warner-Lambert led to a reduction of lead times of Listerine from 21 days to 11, the inventory was cut by two weeks, orders became
6
Hoffman (2003) “IT Innovation Interruptus. Several years of budget cuts have unplugged many innovative IT projects. But some pockets of creativity remain.” Computerworld, September 29, 2003, http://www.computerworld.com/industrytopics/retail/story/0,10801,85310,00.html Accessed on March 2, 2007. 7
Building on Cohen and Levinthal (1989, 1990, 1994), Lane et al (2006) argue that a company’s ability to identify scientific and technological knowledge and to commercialize it by relating it to its products and markets, i.e., its absorption capacity capability is the by-product of prior innovation and problem solving. It depends on the individual absorptive capacities of the organization’s members and builds on prior investments made in its members’ individual absorptive capacities. See Lane, P., B. Koka, and S. Pathak (2006) “The Reification of Absorptive Capacity: A Critical Review and Rejuvenation of the Construct.” The Academy of Management Review, 31(4), 833-863; Cohen, W., and D. Levinthal (1989). Innovation and Learning: The Two Faces of R&D. The Economic Journal, 99(397), 569-596; Cohen, W., and D. Levinthal (1990). Absorptive Capacity: A New Perspective On Learning And Innovation. Administrative Science Quarterly, 35(1), 128-152; and Cohen, W., and D. Levinthal (1994). Fortune favors the prepared firm. Management Science, 40(2), 227-251.
7
more consistent, production cycles were smoothed, the sales increased by $8.5 million, and there was improved joint communications on merchandise and promotional planning.8 Examples like this make it clear that the ability to innovate comes easier to companies like Wal-Mart. The company has a tradition in IT innovation, with a corporate culture that values the role of IT. Sooner or later competitors will replicate individual IT innovations, Kmart adopted CPFR around 2001, but they had a more difficult time replicating Wal-Mart’s IT innovation capability.
THE SANDBOX In order to support our argument we will need a group of firms that have been innovative with IT. Since 1997, Information Week has been tracking the IT practices of the nation's largest and most innovative IT organizations and publishes its findings in the annual Information Week 500 (IW500) report. This report includes the list of companies that have demonstrated a pattern of technological, procedural and organizational innovation. Companies are evaluated in terms of their practices in core areas of operations including their approach to electronic business, customer-knowledge solutions, technology deployment, IT budgets, infrastructure, and IT strategies. Our data set captures the list of companies that have attained the IT innovator status on any year from 1997 to 2004. This first step produced 1266 firms (See table 1). While, the IW500 is a good starting point for our analysis it has one limitation: It does not provide us with any companies that have not been innovative with IT during this period. Companies may be non-innovative for at least two reasons: they don’t have the 8
Parker, L. “Wal-Mart gets onboard early with collaborative planning,” Drug Store News, Feb 19, 2001.
8
resources to develop the IT innovation capability or they don’t think that it is worth developing such a capability. To deal with this, we turned our attention to one of the main criticisms that has been raised against developing the IT capability. ITI does not lead to sustainable competitive advantage because it is easily replicated by competitors.9 The adverse effect of peer recognition on the competitive success of a company has been argued and empirically documented in the management literature and in the IT literature10. In other words, competitors will try to compete away any IT or non-IT related advantage. Table 1
IT Innovators (Any year between 1997-2004) Non-IT Innovators Data Set Total
IW500 Firms
Hoovers Firms
1266
1266
0
945 2210
To capture this we looked at the ITI behavior of the top three competitors for each one of the IW500 firms. We limited our search in the top three in order to ensure that only large firms, firms that might have qualified for the IW550 list in terms of size, were
9
The argument has been repeated several times. For example in Wall Street Journal – the (1987) "Marketing Tool: Computer Finds a Role In Buying and Selling, Reshaping Businesses -Drugstores Check Inventories And Order Automatically, Giving McKesson an Edge - How Junkyards Go National," we read that “... Not surprisingly, some competitors matched McKesson's computer systems.” In Zachary, GP (1991) "Technology," The Wall Street Journal, 11/11/1991, page B1. “Moreover, computers seldom confer a competitive advantage because rivals "end up doing the same thing," Mr. Loveman says.”So computers simply raise the ante for playing in the market." More recently Carr (2003) argued that the IT capability has become homogenized hence it does not matter. 10 Porter, M (1980) Competitive Strategy, The Free Press, New York; Porter, M (1985) Competitive Advantage, The Free Press, New York; Chen, MJ., and D. Miller (1994) Competitive attack, retaliation and performance: an expectancy valence framework,” Strategic Management Journal, 15(2), 85-102; Dehning, B., and T. Stratopoulos (2003) Determinants of a sustainable competitive advantage due to an IT-enabled strategy,” Journal of Strategic Information Systems, 12(2003), 7-28.
9
included in our set. We used Hoovers11 to generate the list of companies that are perceived to be the top competitors for each of the IT innovative firms. As was expected, the majority of competitors were already in the IW500 list. There were 945 (43%) of firms who did not appear in the IW500 list. The combined data set had 2211 firms. Our final data set had firms from a wide spectrum of industries (See table 2). Using this data set we looked at a series of questions. Is the ability to innovate with IT sustainable? The foundation for dealing with this question is that the capability to be innovative with IT is a systematic process that is likely to be the result of strategic choices. Firms that have developed this capability are more likely to continue nurturing it and enjoying its competitive gains. Table 2 Industries
Sample of Firms
Agriculture
Dole, Del Monte, CHS
Mineral Industries
Occidental Petroleum, Halliburton, Dynegy
Construction
Centex Homes, Lennar, DPR, EMCOR Group
Manufacturing
Deere, Owens, Dow, 3M, Eastman Chemical, Black & Decker, Cisco, HP, Dell, Sun, Caterpillar, Procter & Gamble, Intel.
Transportation, Communication & Utilities
Duke, Yellow Roadway, Royal Caribbean, DHL, Schneider national, FedEx.
Wholesale and Retail Trade
Wal-Mart, Tiffany, Staples, Loews, CVS, Sears, Home Depot.
Finance, Insurance & Real Estate
Cigna, Aetna, Citigroup, State Street, Fidelity, Met Life, Morgan Stanley, Humana.
Service Industries
Harrah’s, Equifax, Marriot, CA, IBM, Manpower, BoozAllen.
11
Hoovers is a subsidiary of Dun & Bradstreet, and has a database of 21 million companies and an in-
10
Looking at the attributes of such firms12, we found the following: Organizations that innovate mindfully with IT will resist the temptation to be complacent about a new innovation’s benefits. Conversely, they will view the IT innovations with critical analysis, reviewing outputs and outcomes as related to their firm-specific idiosyncrasies of internal processes, products, and markets. These organizations understand that innovating with IT is a risky process and they will not settle for simplified approaches. Such an organizational mindfulness is embedded in the learning of individual members and the creation of ongoing learning ability that organizational members can help to foster in one another.13 Therefore, the development of the capability of an organization to innovate with IT is cumulative and based on prior choices and investments that the firm has made in the past. Firms that have developed this capability are more likely to maintain it in the foreseeable future. Conversely, competitors that do not possess such a capability are not likely to be able to replicate it with relative ease. Hence, our question is this: what is the probability that a firm will continue to innovate consecutively with IT? In order to test this we divided our firms into two groups, IT innovators and non-IT innovators for each year within our data set. We used this information in order to calculate transitional probabilities, i.e., probabilities that a firm will maintain its status (IT innovator or non-IT innovator) in the following year. See Appendix A for a brief description and an example of calculating transition probabilities. The results - summarized in table 3 - seem to
house editorial staff of industry experts. 12
Swanson, E.B., and Ramiller, N.C. (2004) “Innovating Mindfully with Information Technology.” MIS Quarterly, 28(4), 553-583 13
See Lane, P., B. Koka, and S. Pathak (2006); Cohen, W., and D. Levinthal (1989); Cohen, W., and D. Levinthal (1990).; and Cohen, W., and D. Levinthal (1994) ibid.
11
support our argument. Table 3
Non-IT Innovator IT Innovator
Non-IT Innovator IT Innovator 91% 9% 32% 68%
The estimated transition probability that the firm will be non-IT-innovative if it was non-Innovative the previous year is 91%. On the other hand the probability that a firm will maintain its ITI capability from one period to the next one is 68%. Seeing the matrix from the standpoint of change in a firm’s status, the probability that a firm will escape from its non-innovative status is small (9%). The risk that an ITI firm will be noninnovative in the following period is relatively high (32%). What is the effect of perception on the sustainability of Innovation with IT? In our second research question we turn our focus to the influence of IT Confidence Index in a firm’s decision to innovate with IT. To support our argument we will built on an approach developed by Gartner Research called ‘Hype Cycle’. According to the Hype Cycle14, new technologies tend to go though a cycle that starts with a technological breakthrough or the launch of a new product ("technology trigger") that generates significant press and interest. In the next phase, this publicity generates over-enthusiasm and unrealistic expectations (“inflated expectations”). Some of the firms that invest with this mindset may be successful in their application of the new technology; however the number of 14
The discussion on the Hype Cycle is based on Fenn, J. and A. Linder (2005) Gartner’s Hype Cycle Special Report for 2005, August 5th, 2005, and Gartner Research - Online (2007) “understanding hype cycles,” http://www.gartner.com/pages/story.php.id.8795.s.8.jsp .
12
failing firms tends to be much higher. This logical failure to meet unrealistic expectations leads to the "trough of disillusionment.” The Media and opportunistic adopters of the technology quickly abandon ship. In spite of this, a smaller group of firms continue experimenting with the new technology and gradually understand the benefits and practical application of the technology in the context of their business ("slope of enlightenment"). Eventually, the technology becomes commoditized and adopted by a wide spectrum of firms (“Plateau of Productivity”). If the IT spending budgets are a barometer reflecting the mood and perception towards innovation with IT then it is clear that we are dealing with a cyclical phenomenon. As we have seen through the ITCI, the attitude and propensity to innovate with IT has changed dramatically in the last ten years. During the period of the dot-com boom (the introduction of Netscape in the mid-nineties to the collapse of NASDAQ in the early 2000) we had the phenomenon of ‘soft IT budgets’15. Companies with or without IT innovation experience invested heavily in any new IT project that was associated with ecommerce with little or no concern for the IT budget (period of soft IT budgets). This rather opportunistic approach to ITI has been called ‘mindless’ by academics and 'computing-by-fad’ by professionals16. As it might have been expected, some of the companies that take an opportunistic approach to IT innovation are likely to be successful. However, the number of firms that will not be able to extract the desired benefits from their IT investments is likely to be 15
The Hungarian economist Janos Kornai introduced the term ‘soft budget’ in order to explain the way the socialist planning system worked. As the name indicates the budget was adjusted to account for the needs of the central plan. 16
See Swanson and Ramiller (2004) ibid, and Blums, R "IT Innovation Slowed, but not ITIL" ComputerWorld, 1/17/2005. http://www.computerworld.com/managementtopics/management/story/0,10801,98872,00.html?SKC=mana gement-98872
13
higher. During periods when a strong IT related fashion becomes popular the IT budgets become soft and a larger number of companies try to innovate with IT. Statistically, this leads to a larger number of innovators, however these innovators are not likely to be able to sustain an IT innovation capability if they follow such an opportunistic approach. The years following the dot-com crash were years of ‘hard IT budgets’ and cutbacks and a scale back in IT innovation related projects17. We had moved into the stage of disillusionment. The article of Carr (2003) reflected the prevailing attitude of those who had followed an opportunistic approach in the previous years and now they were slashing their IT budgets. During the period of hard IT budgets only the group of firms with the proven capability of sustaining IT innovation continued to be innovative with IT. These firms are more likely sustain their capability to innovate with IT. Hence our second argument, the persistence of IT innovation capability will be weaker during periods of ‘soft IT budgets’ and higher during periods of ‘hard IT budgets’. The pre and post Y2K time period offers a unique opportunity to test this. In order to test our argument we split our data set into a pre and post Y2K period and we calculated the transition probabilities for each period. The results appear in table 4. Table 4 97 to 00 Non-ITI ITI
Non-ITI ITI 89% 11% 40% 60%
01 to 04 Non-ITI ITI
Non-ITI ITI 93% 7% 26% 74%
Contrasting the transition probabilities shows that, while IT innovativeness is persistent both prior and post dot-com boom, there seems to be a significant difference. 17
Hoffman (2003) ibid.
14
The probability that a firm would maintain its ITI capability increased from 60% in the pre-Y2K period of ‘soft IT budgets’ to 74% in the post-Y2K period. One can speculate on these results and argue that during the period of 1997-2000 we had two major drivers that defined the ITCI: the issue of fixing the Y2K problem and the dot-com bubble. The first one introduces a sense of incoming doom, which made the concept of the soft IT, budget possible. After all, who is willing to risk not investing in the solution of a problem that might have brought the company to its knees? The second one introduced a sense of euphoria and optimism around everything that had to do with dot-com and e-commerce. The result was a bandwagon type of approach to IT innovation. One would expect, given the increased amount of spending on IT budgets, that it would be more likely to occasionally see firms attaining a status of IT innovator. The collapse of the dot-com bubble coupled with the feeling that the Y2K scare had been exaggerated led to the disillusionment of management with IT. Based on these results we argue that during the period of 1997-2000, the period of the dot-com boom, more companies jumped on the IT innovation band wagon and, as a result, a higher number of firms were vying to attain the status of IT innovator. On the other hand, after the collapse of the dot-com bubble, we observed a slashing of IT budgets. This means that only the hard core of companies having a history of successful, and mindful, governance of IT innovation would maintain their IT innovator status. These results offer further validation to our prior argument that IT innovation is a pathdependent and systematic capability. Systematic, Opportunistic, and non-ITI. An implicit corollary of the first and second research questions is the fact that we need to make a distinction between different
15
groups of IT innovators. The implicit suggestion of the first research question is that there is a well-defined distinction between companies that innovate with IT and companies that don’t. In the second research question, we see that, within the group of IT innovative firms, we can make the distinction between systematic and opportunistic IT innovators. In summary, when it comes to innovation with IT we have three types of firms: 1) Firms that take a systematic approach in their IT enabled innovations, 2) firms that, from time to time, may jump on the proverbial IT innovation band wagon; they are opportunistic ITI, and 3) firms that are non-IT innovative or followers. The attributes of firms and their approach to IT innovation between the systematic and opportunistic group are diametrically opposed. Firms in the former of these groups seem to be taking a long-term and strategic approach to IT innovation. They tend to have substantial in-house experience in selecting and implementing IT projects and are more likely to have the know-how to evaluate the role of new applications in the context of their organization. Systematic IT innovators tend to continue being innovative with IT during periods of soft as well as during periods of hard IT budgets. Fierce competitors like FedEx and UPS continued on their IT innovation course ever during the period of post Y2K hard IT budgets18. Opportunistic IT innovators will tend to take a short-term approach and are more likely to be driven by the prevailing attitude towards IT. Given the significant differences between these two groups, those identified as having an opportunistic attitude toward innovation with IT are more likely to fall into the category of non-Innovators than advance into the systematic innovators group. In other words, the development of the capability to “sustain IT innovation and respond to
18
Hoffman (2003), ibid.
16
changing market condition,” i.e., the IT capability is a systematic process that one cannot replicate by simply acquiring IT resources19. For the testing of the third research question we used five-year rolling windows20. Within each one of these five-year windows we classified firms as follows: A firm is non-ITI if the firm did not appear in the IW500 list of firms for any of the five years. The firm was considered to be an opportunistic innovator if it appeared only once and systematic IT innovator if is has appeared two or more times. Therefore, our probability matrix will be three-by-three this time. The transition probabilities results are summarized in Table 5. Table 5
Non-ITI Opportunistic ITI Systematic ITI
Non-ITI 94% 32% 0%
Opportunistic ITI 6% 47% 10%
Systematic ITI 0% 21% 90%
The estimated probability that a firm will maintain its non-IT innovator status from one year to another is 94%. It seems that it is relatively difficult for a non-IT innovative firm to switch ranks to the opportunistic innovator status within a short time period. The probability of something like this happening is 6%. In our data set, it is impossible for a firm to switch from non-innovator to systematic innovator status to occur. The results seem to suggest that it is relatively difficult for a company with no
19
According to Bharadwaj, A., V. Sambamurthy, and R. Zmud (1999) “IT Capabilities: Theoretical Perspectives and Empirical Operationalization,” Proceedings of the 20thInternational Conference on Information Systems, Charlotte, North Carolina, United States, 1999, 378-385, an IT capable company is the one with the “overall ability to sustain IT innovation and respond to changing market conditions through focused IT applications.” (p. 381) 20
We repeated the process using three and four-year windows. The estimated probabilities based on the rolling 3, 4 and 5-year windows are relatively consistent.
17
prior experience or IT innovative capabilities to develop these capabilities within a short time period. Looking at the transitional probabilities of firms that currently are classified as opportunistic IT-innovators, we found that the probability of maintaining their current status is 47% and that of falling into the non IT-innovator category is 32%. The probability of lifting themselves to the ranks of systematic IT-innovators is is relatively lower at 21%. These probabilities seem to indicate that the group of opportunistic ITinnovators is more likely to support IT innovation during time of growth and likely to cut back during the slow periods. We speculate that these types of companies are not likely to have a long-term strategic view of the role that IT innovation can play in the company's growth. The transitional probabilities for the systematic IT-innovators provide further support to our arguments. The probability that a systematic IT-innovator will maintain its status within consecutive periods is very high, 90%; and the chances that they will fall into an opportunistic IT-innovator status are significantly lower, 10%. Overall, the results of our empirical analysis seem to indicate that, at least within the group of firms in our data set, there is strong support for our research question. The development of the capability of an organization to sustain IT innovation is a cumulative and path-dependent processes. CONCLUSION The tri-partite question of “whether, when, and how to innovate with information technology” rests in the core of managerial quest for success21. A quick search in the
21
Swanson and Ramiller (2004: 553) ibid.
18
professional magazines and newspapers produced numerous articles, blogs and white papers on IT innovation. While the perceived business value of innovation with IT is changing with the prevailing ITCI, the fact is that practicing managers perceive ITI as an enabler of innovation within their firm and a critical tool for envisioning and creating innovation22. In many organizations, senior managers consider the term IT innovation as a synonym for organizational innovation23. If the recent past is an indicator of the future then we can safely predict that new technological innovations will continue coming and managers will continue wrestling with the issues of whether, when and how to innovate with IT. Approaching the IT innovation from a strategic management standpoint, the papers tries to shed light on some of the aspects of the whether to innovate with IT question. The empirical results seem to support our proposition that the development of the capability of an organization to sustain IT innovation is a cumulative and path-dependent processes. Hence, innovating with IT can be a source of competitive advantage.
22
Picolli, G. (July 18, 2006). Raising the stakes in IT innovation. http://www.cutter.com/research/2006/edge060718.html and CIO (2007) State of the CIO ’07: Expanded Survey Results, January 2007, http://www.cio.com/state/index.html 23 Perkins, B. (July 10, 2006). Stifling IT innovation. Computerworld. http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=112313
19
APPENDIX A Reviewing the literature on persistence of innovation, we came across two statistical methods: The first one looks for the stationary of the process through a firstorder autoregressive model.24 The second one uses a Transition Probability Matrix (TPM) to estimate an implicit first-order autoregressive process and, through this, the persistence of innovation.25 Given the fact that the former of these approaches tends to yield biased estimators in small samples, we will use the TPM approach. The Transition Probability Matrix (TPM) approach leverages the cross-sectional and time series information by describing the evolution of a cross section distribution over time. In the context of our study we will be following the status of a firm as an ITI or non-ITI for a period of eight years. Ft+1=P*Ft
(1)
Where Ft+1 maps the distribution of IT innovativeness across firms in period t+1, Ft maps the distribution of IT innovativeness across firms in period t, and P maps one distribution into another and tracks where points in Ft end up in Ft+1. The Transition Probability Matrix (P) captures information regarding the mobility of firms and the persistence of the IT innovation process. The elements of the TPM are the probabilities (pij) that a firm will move from, let’s say, the status of non-IT innovator (i) in period t to the status of IT innovator (j) in time t+1. Based on this the typical TPM will look like:
24
Malerba, F., Orsenigo, L., and Peretto, P. (1997). Persistence of innovative activities, sectoral patterns of innovation and international technological specialization. International Journal of Industrial Organization, 15(6), 801-826. 25
Cefis, E. (2003). Is there persistence in innovative activities? International Journal of Industrial Organization, 21(4), 489-51; Cefis, E., and Orsenigo, L. (2001). The persistence of innovative activities. A cross-countries and cross-sectors comparative analysis. Research Policy, 30(7), 1139-1158.
20
& p 1 ' p# (2) P( X t +1 = i | X t = j ) = $ q !" %1 ' q
And the implied first order autoregressive AR (1) process will be as follows: [xt+1=i]=(1-q) + p*[xt=i]+vt
(3)
If p+q>1 the process is persistent. The following example provides a hypothetical TPM and the calculation of the first order autoregressive process. Let's assume that we have 5 firms (A... E) and two states (xt) of IT innovation in each period, i.e., xt=0 for companies with non IT innovative status in period t, and xt=1 for IT innovative firms. Table A1, contains hypothetical figures for five years.
Table A1 Firm
xt
xt+1
xt+2
xt+3
A
0
0
1
0
B
0
1
1
0
C
0
0
0
1
D
1
1
1
0
E
0
0
0
1
Based on this we can create three TPMs, xt to xt+1, xt+1 to xt+2, and xt+2 to xt+3. The first one will look as follows:
Table A2 Non IT Innovative, xt+1=0
IT Innovative, xt+1=1
Non IT Innovative, xt=0
p=P(xt+1=0|xt=0)=3/4=.75
1-p=P(xt+1=1|xt=0)=1/4=.25
IT Innovative, xt=1
1-q=P(xt+1=0|xt=1)=0/0=0
q=P(xt+1=1|xt=1)=1/1=1.0
21
".75 .25% Hence P(xt+1=i|xt=j) = $ ' # .0 1.0& Based on these we have that: [xt+1=1] = 0 +!1.75 [xt=1] + vt
22
