Business value of information technology in the internet economy

Copyright by Fang Yin 2002 The Dissertation Committee for Fang Yin Certifies that this is the approved version of the following dissertation: Business Value of Information Technology in the Internet Economy Committee: Andrew B. Whinston, Supervisor Anitesh Barua, Co-Supervisor Eleanor Jordan Prabhudev Konana Li Gan Business Value of Information Technology in the Internet Economy by Fang Yin, B. Dissertation Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy The University of Texas at Austin August, 2002 UMI Number: 3108540 ________________________________________________________ UMI Microform 3108540 Copyright 2004 by ProQuest Information and Learning Company. All rights reserved.

This microform edition is protected against unauthorized copying under Title 17, United States Code. ____________________________________________________________ ProQuest Information and Learning Company 300 North Zeeb Road PO Box 1346 Ann Arbor, MI 48106-1346 Dedication To my parents, Jinpei Yin and Rongdi Zhou Acknowledgements I am greatly indebted to my supervisors Dr. Whinston and Dr. Anitesh Barua, who have taught and guided me during the past four years.

They inspired great ideas about my research and helped me finish the whole process. I am also grateful to Dr. Prabhudev Konana for his excellent advice and support. My sincere thanks also go to Dr.

Eleanor Jordan, who has given me valuable advice for my graduate study, and Dr. Li Gan, from whom I learned a lot about econometrics. I could not have completed this work without the encouragement and support from my wife, whose love is the most valuable to me. v Business Value of Information Technology in the Internet Economy Publication No._____________ Fang Yin, Ph.

The University of Texas at Austin, 2002 Supervisors: Andrew B. Whinston & Anitesh Barua This dissertation consists of three essays that address the issue of the business value of Information Technology (IT) in the context of the Internet economy. The first essay studies the productivity of IT in the context of pure Internet based companies or dot coms. Various dot coms are divided into two groups: “digital” dot coms whose product and service can be distributed in digital form, and “physical” dot coms whose product needs to be physically shipped to customers.

Compared to digital dot coms, physical dot coms have lower extent of digitization due to the restriction of the physical nature of their product. Therefore, it is hypothesized that IT capital contributes more to the performance of digital dot coms than to that of physical dot coms. This hypothesis is supported vi by a production economics based analysis based on data from publicly traded dot coms. The second essay studies the transformation of the traditional companies toward the Internet-enabled electronic business.

A holistic, process-oriented theoretical model is proposed to link IT applications and complementary factors to firm performance. The model postulates that only when Internet-based IT applications are associated with synergistic changes in complementary aspects such as inter- and intra-organizational processes as well as customer and supplier readiness can a firm experience improvement in its performance. The model is empirically validated with data from more than a thousand companies and reveals some interesting results. The third essay applies the model developed in the second essay to study the difference in the adoption and pay-off of the Internet among firms of different sizes.

The small business literature has established that small firms are facing very different opportunities and barriers from those faced by large firms. It is found that small firms are more likely to embrace the Internet on the customer side IT applications and processes while large firms are more likely to focus on supplier related IT applications and business processes. vii Table of Contents LIST OF TABLES .xi LIST OF FIGURES .xii CHAPTER 1 PRODUCTIVITY OF DOT COM INFORMATION TECHNOLOGY INVESTMENT 1 1.2 Motivation and Prior Literature .4 Production Function Based Modeling .5 Data and Measurement .3 Non-IT capital.6 Empirical Analysis and Results.1 Cobb-Douglas production function .2 Translog production function .3 Cobb-Douglas function using per employee input and output .4 Pooled Cobb-Douglas regression including a dummy variable .5 Test for endogeneity of inputs .7 Discussion of Results.1 Investing the marginal dollar.2 Business process digitization and production functions.3 Should the physical dot coms abandon ship? .36 CHAPTER 2 ELECTRONIC BUSINESS TRANSFORMATION OF THE TRADITIONAL FIRMS 38 2.3 Electronic Business Enablers.1 Customer-oriented IT applications .2 Supplier-oriented IT applications .3 Internal System integration.4 Customer and supplier related processes.5 Customer and supplier electronic business readiness.1 Operationalization of constructs .3 Electronic business enablers .2 Instrument design and refinement .1 The Measurement Model.2 The Structural Model.5 Discussion of results .77 CHAPTER 3 DIFFERENCE IN ADOPTION OF THE INTERNET ENABLED BUSINESS: SMALL VS.2 Motivation and literature .3 Model and hypotheses .2 Customer and supplier related processes.3 Customer & supplier readiness.4 Digitization levels and financial performance measure .6 Analysis and discussion.1 Reliability and validity .2 Test based on measurement model with structured means.3 Two sample z-test for transactional capability .4 Test for payback in financial measure .5 Test for difference in impacts of adoption.7 Limitation and Conclusion .109 TABLES AND FIGURES 113 APPENDIX 132 BIBLIOGRAPHY 133 VITA 151 x business.economy List of Tables Table 1.1 Characteristics of Digital and Physical Dot Coms .2 Summary Statistics for Digital and Physical Dot Coms (Means for Firms Having Positive Gross Income**).3 Summary Statistics for Digital and Physical Dot Coms (Means over Full Sample**, in Constant 1996 Dollars) .4 Industry Hourly Labor Cost.5 Regression Results Using Cobb-Douglas Production Function.6 Translog Input Elasticity for Digital Dot Coms .7 Cob-Douglas Function Using Per Employee Inputs and Output.8 Cob-Douglas Function with Dummy Variable.9 Instrumental Variables Estimators. 1 Distribution of Firms in the Sample.

2 Summary of Constructs. 3 Comparison of VE and squared correlation. 4 Confidence Interval of Estimated Correlation among Constructs. 5 Summary of the Measurement Model.

6 Summary of the Structural Model. 7 Standardized Total Effects. 1 Result of Measurement Model with Structured Factor Means. 2 Difference in proportion of adopting various transactional capabilities.

3 Z-test of the Proportion of Firms Seeing Financial Payoff. 4 T-test of Means of Percent Increase in Financial Measures.economy List of Figures Figure 2. 2 Results of the Structural Model. 1 Results of the Structural Model.economy Chapter 1 Productivity of Dot Com Information Technology Investment 1.1 INTRODUCTION The dramatic rise and fall of “dot coms” or pure Internet based companies have received unprecedented attention in the business press.

In the aftermath of the dot com crash that began in early 2000, an important and interesting research issue facing researchers and practitioners alike involves the productivity and financial performance of Internet based organizations. While numerous practitioner-oriented articles have focused on factors leading to the crash (e., irrational investor expectations, uncontrolled growth, wasteful spending, etc.), the academic literature on the performance analysis of dot coms is sparse at best. Yet an analysis of the performance of various types of dot coms can provide valuable insights into the phenomenon of leveraging the Internet for business activities. For example, it can suggest whether all types or certain groups of dot coms were unproductive in taking advantage of the opportunities created by the Internet.

It can also indicate the efficiency of resource allocation by these firms. Subramani and Walden (2001) note that high profile dot coms such as Amazon.com spend between 9 and 16 percent of their revenues on Information Technology (IT), while traditional retail and distribution industries spend only about 1 percent of revenues on IT. Do these relatively large IT investments pay off for the dot coms? Given that many dot coms (both publicly traded and privately held) are still in business but struggling for survival (Helft 2001), an investigation of past dot com 1 business.economy performance can suggest potential pitfalls as well as avenues of untapped opportunities. For example, according to an Industry Standard survey, as of October 2001, “34 percent of the online retailers studied have perished or been purchased” (Helft 2001).

What lessons can the surviving dot coms learn in order to conduct successful business operations? Further, as traditional organizations migrate many of their business activities to the Internet, can they also benefit from insights regarding productive and unproductive activities in an online world? In the late nineties, online traffic and the total amount of business conducted through the Internet were growing rapidly (e. Subramani and Walden 1999; Subramani and Walden 2001), creating unprecedented opportunities. However, while there has been a dramatic growth of business on the Internet, “big is not necessarily better” (Barua et al. Generating all revenues online does not necessarily imply productive operations and better financial performance such as increased profitability.

During the height of the dot com boom, the conventional wisdom was that the Internet would enable sellers to reach large markets without the usual costs associated with retailing operations. However, the failure of many early and high-profile dot coms raises questions about the accuracy of the above assumption, and provides the motivation to study dot com performance for insights into drivers of productivity. Yet another reason makes it interesting to analyze the productivity of dot coms. Research in Information Technology (IT) productivity has often implicitly assumed that positive IT impacts exist, but that they may have remained elusive due to measurement and methodological limitations (e.

Barua et al.economy Brynjolfsson and Hitt 1993). However, the dramatic proliferation of the Internet in the business world since 1995 necessitates a reexamination of this point of view. The Internet and its related technologies and applications are widely available to all types of organizations across the globe. Prior to the Internet revolution, organizations often invested in vendor or technology specific applications that were not open or ubiquitous in nature.

For instance, Electronic Data Interchange (EDI) has been around for over twenty years, and has yet failed to capture a significant volume of business transactions owing to the difficulties and cost of adoption. However, organizations adopting EDI technologies have enjoyed significant benefits. By contrast, the Internet provides a “level playing field” in terms of a low cost, globally accessible network infrastructure, open standards and applications that are based on the user-friendly universal Web browser. Given this technology equalizing effect of the Internet, does investing more in Internet related IT still lead to better firm performance? To address these research issues, this study distinguishes between two types of dot coms: Digital and physical.

Digital dot coms are Internet based companies such as Yahoo, eBay and America Online, whose products and services are digital in nature, and which are delivered to consumers directly over the Internet. The physical dot coms are also based entirely on the Internet in that they do not use physical retail channels, but sell physical products (e., books, CDs, jewelry, toys) that are shipped to consumers. They are referred to as electronic retailers (e-tailers) by the business press, and include electronic commerce pioneers such as Amazon.com and ashford.economy distinction enables investigating whether Internet based IT investments have similar impacts on physical and digital dot coms. Based on the economic characteristics of information products and services, it is hypothesized that IT investments contribute more to various output measures (e., sales, sales per employee, gross income and gross income per employee) for digital dot coms than for physical dot coms.

The rationale is that the current level of digitization of business processes is currently higher in digital products companies than in Internet based firms selling physical goods. While the Internet and electronic commerce applications are equally accessible to both types of companies, electronic retailers of physical products often build warehouses, handle inventory, and are subject to many of the physical constraints of bricks- and-mortar companies. By contrast, due to the very nature of their business, most of the processes and delivery mechanisms of digital dot coms are implemented online. Further, the ability of a digital dot com to differentiate itself from its competitors directly depends on being able to translate innovative business strategies into online capabilities.

Electronic retailers also suffer from the lack of complementary digitization in their value chain.