DOES INFORMATION TECHNOLOGY ALWAYS LEAD TO BETTER FIRM PERFORMANCE? THE ROLE OF ENVIRONMENTAL DYNAMISM

Abstract

In recent years, there has been considerable interest in whether and the extent to which information technology contributes to firm performance and business value. Using the resource-based view of the firm, recent research highlights the notion of IT capability of the organization and finds that higher IT capability leads to superior firm performance. This study, however, argues that one has to reckon the influence of environmental uncertainty (in this study, specifically dynamism) when evaluating the link between IT capability and business value. This study makes use of Galbraith’s information processing theory of the firm, which posits that information processing needs and capabilities must match for superior performance. Extending this argument, one would expect that organizations need much greater amounts of information in more dynamic environments and that greater information processing capabilities (accrued via superior IT capabilities) must exist in such environments and vice versa. Using cross-sectional archival data, this study finds, somewhat contrary to previous assertions, that high IT capability does not add business value to firms operating in more dynamic environments, but that it does add business value in relatively more stable environments. In addition, under low environmental dynamism condition, the performance advantages of high IT capability are found to sustain over time. These findings raise interesting implications and directions for future research. Further, environmental dynamism emerges as a quasi-moderator of the relationship between IT capability and firm performance.

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