Digital transformation and resultant business model innovation have fundamentally altered consumers’ expectations and behaviors, putting immense pressure on traditional firms, and disrupting numerous ...markets. Drawing on extant literature, we identify three stages of digital transformation: digitization, digitalization, and digital transformation. We identify and delineate growth strategies for digital firms as well as the assets and capabilities required in order to successfully transform digitally. We posit that digital transformation requires specific organizational structures and bears consequences for the metrics used to calibrate performance. Finally, we provide a research agenda to stimulate and guide future research on digital transformation.
Research Summary
The behavioral theory of the firm suggests that organizations make strategic choices to retain or search for a technology based on performance feedback in comparison to ...organizational aspiration. Such technological choices become challenging as decision makers face uncertainty not only in technological search, but also from technology deterioration and market turbulence. While different organizational aspirations have been used in prior research, their performance and risk implications for technological choices are unclear. I advance theory by conducting a simulation study to systematically investigate the performance and risk of technological choices with different organizational aspirations, and explore their contingencies on technological and market uncertainty. The simulation results provide novel insights into the indispensable role of goal setting to ascertain organizational performance.
Managerial Summary
Goal setting has important impacts on the performance and risk of strategic decisions. While it is often believed that processing more information can help managers cope with uncertainty, this study shows that paying attention to both internal and external performance goals may be suboptimal for technological choices. Solely relying on an internal performance goal may even do more harm than good. A superior way of goal setting is to focus on external performance information from a reasonable reference group, such as firms with a similar performance or all industry peers rather than the best‐in‐class in the industry. This is more beneficial when technologies rapidly change and is less useful when customer preferences shift due to unpredictable shocks (e.g., the COVID‐19 pandemic).
Situated in the U.S. electric utility industry in a period of significant market restructuring, our study investigates how market valuations of a firm’s investments to develop intrafirm and interfirm ...information technology (IT) capabilities are conditional on regulatory context. We find that firms are rewarded by investing in intrafirm IT capabilities in a more deregulated context, and by investing in interfirm IT capabilities in a more uncertain regulatory context. When deregulation expands customer choice, intrafirm IT capabilities create value by enabling greater efficiency and service reliability through coordination of a firm’s internal activities. When regulatory uncertainty increases for key aspects such as price control, value chain configuration, and information control, interfirm IT capabilities create value by enabling greater flexibility through reduction of external transaction costs with customers and suppliers. When allocating resources to develop IT capabilities, executives need to consider that market valuation of IT capabilities development is not static, but dynamic with changes in market structure and regulatory uncertainty. Regulators also need to consider that the regulatory context that they shape through their deliberations and decisions has a substantial impact on the market valuation of investments by firms to develop different types of IT capabilities.
Prior research has differentiated intrafirm information technology (IT) capabilities that reduce internal coordination costs and interfirm IT capabilities that reduce external transaction costs. However, the influence of developing these capabilities on business value has not been explored in the realm of institutional governance—the regulatory context that defines the rules of the game for firms. We suggest that the value of a firm’s investments in different types of IT capabilities development (ITCD) is evaluated by the financial market contingent on the firm’s regulatory context. Our study is situated in the U.S. electric utility industry undergoing a market restructuring process to understand the impacts of intrafirm and interfirm ITCD on market value conditional on a firm’s regulatory context characterized by the extent to which its business is located in states that allow consumer choice (i.e., deregulation), as well as the extent to which its business is located in states that deliberate regulations regarding price control, value chain configuration, and information control (i.e., regulatory uncertainty). We find that intrafirm ITCD for enhancing efficiency is rewarded in a firm’s market valuation under a high level of deregulation. We further find that under a high level of regulatory uncertainty, interfirm ITCD for fostering flexibility can hedge against regulatory uncertainty and increase firm value. A key contribution of our work is demonstrating external institutional governance can influence the market value that firms accrue from different types of ITCD, thereby elaborating the complementarity in theoretical explanations of IT capabilities and institutional governance.
History:
Rajiv Kohli, Senior Editor; Huigang Liang, Associate Editor.
Supplemental Material:
The e-companion is available at
https://doi.org/10.1287/isre.2023.1228
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Firms’ investment in information technology (IT) has been widely considered to be a key enabler of innovation. In this study, we integrate prior findings on the augmenting pathways (where IT ...investment supports innovation) with a new theory explaining the suppressing pathways (where dynamic adjustment costs associated with large IT investment can be detrimental to innovation) to propose an overall inverted U-shaped relationship between IT investment and commercialized innovation performance (CIP). To test our theory, we analyze a unique panel dataset from the largest economy in Europe and discovered a curvilinear relationship between IT investment and CIP for firms across a broad spectrum of industries. Our research presents empirical evidence corroborating the augmenting and suppressing pathways linking IT investment and CIP. Our findings serve as a cautionary signal to executives, discouraging overinvestment in IT.
The resource-based theory suggests that profitable growth of the firm is bound by firm-specific managerial capability, which has to be internally developed via accumulation of firm-specific ...managerial experience over time. In this study, I investigate the contingency of rent-generating potential of firm-specific managerial experience by focusing on two particular organizational characteristics — slack and uncertainty. I propose that firm-specific managerial experience realizes its rent-generating potential in conjunction with organizational slack, and firm-specific managerial experience has greater rent-generating potential when organizational uncertainty is high. Empirical evidence based on large-scale longitudinal data from 921U.S. manufacturing firms in almost 20years corroborates the theory. Novel implications for the resource-based theory are discussed.
Marsden and Pingry (2018) discuss different aspects of numerical data that are used in empirical research, with an aim to improve data quality and facilitate research replication in the IS field. ...However, the implications for numerical data from simulation research also need to be discussed. This article tries to join the discussion by using Marsden and Pingry's (2018) What, When, Where, How, Who, Which, and Why aspects to discuss how we can create the necessary, but not sufficient, conditions for data accuracy, validity and reproducibility in simulation research.
•Joining the discussion of Marsden and Pingry (2018)•Numerical data quality in simulation research is discussed.•Unique meaning of data quality in simulation is highlighted.•Suggestions are provided to guide simulation research.
Firms increasingly look to collaboration with alliance partners in their quest for breakthrough innovation. But how does the position of a firm in its alliance network weighted by the centrality of ...its partners—a concept which we term “partner‐weighted alliance centrality”—and the heterogeneities in the types of partners that it cooperates with—in terms of its private‐public collaboration—influence this quest? Using longitudinal data from the U.S. pharmaceutical industry, we build alliance networks in the period 1985–2001 to investigate these questions. We show that, for breakthrough innovation, collaborating with more partners that are more central in alliance networks the better, but only to a point. Beyond that point, we find that the likelihood of achieving breakthrough innovation drops. Furthermore, and looking at the kinds of knowledge provided by the partners in each firm's alliances, we report that firms with a greater share of private partners, relative to public partners, suffer less from the diminishing benefits of collaboration with central partners when developing breakthrough innovation. Taken together, we make novel contributions about how to organize for breakthrough innovation, and provide actionable managerial advice in terms of selecting collaborative partners in alliance networks.
•Challenge the common belief that OUICs are valuable by enabling firms to collect large amount of user-generated ideas.•Propose that simply collecting ideas from OUICs is not valuable, whereas how ...firms deal with the ideas from OUICs matters for value creation.•Adopt a longitudinal design and collect a large-scale panel data set to empirically test the theory.•Provide threefold contribution to IS research on IT capabilities, the business value of IT, as well as IT and innovation.
Social media technologies allow user-generated content and provide new opportunities and challenges for firms to transform their business. In particular, more and more firms have started strategically using the online user innovation communities (OUICs) for open innovation initiatives. The extent to which firms are able to derive business value from OUICs, however, has not been systematically examined. Drawing on a multi-theoretical foundation from the framework of dynamic capabilities and the view of innovation value chain, we conceptualize two OUIC-enabled capabilities, which are, ideation capability related to collecting user-generated ideas about potential innovation from OUIC, and implementation capability related to selecting user-generated ideas for innovation development and introducing developed innovation via OUIC. Using a large-scale panel data set consisting of 1676 firm-day observations from Dell and Starbucks, we examine the impacts of OUIC-enabled capabilities on firm value. We find robust evidence that OUIC-enabled ideation capability actually does not influence firm value, whereas OUIC-enabled implementation capability increases firm value. Novel theoretical and managerial implications are discussed.
Like all other scientific research methodologies, simulation has its strengths and limitations. When used properly, simulation can be a powerful tool for developing new theoretical insights into IS ...phenomena of interest. Although simulation methods are not new in the IS field, there has been no systematic discussion about which simulation methods are suitable for IS research, when simulation is the most appropriate methodological choice for IS research, and how to evaluate simulation research. In this editorial, I provide an overview of simulation methods that may be used in IS research and discuss how they are typically used. More importantly, I provide guidelines for IS researchers on how to choose simulation among alternative methodologies and highlight six key criteria for evaluating simulation research. Overall, this editorial can provide useful guidance to IS researchers, editors, and reviewers when choosing, conducting, and assessing simulation research.
Enterprise system (ES) implementations frequently fail to deliver job benefits for employees, many of whom are dissatisfied with these systems that were implemented to support them in their jobs. The ...literature is clear that the realization of job benefits depends on how these systems are used, motivating us to focus on the determinants and outcomes of effective ES use. Focusing on employees' use of systems to support their work processes, we examine how employees' pre-implementation context-specifically, the use of an incumbent system and the associated work processes-affects their performance expectancy of a new ES and, consequently, their effective use of the ES and the resulting job outcomes. Our results suggest that (1) employees' perceptions of two facets of information transparency based on incumbent system use, namely information visibility and information credibility, have different impacts on employees' performance expectancy of a new ES depending on their perceptions of process standardization in the incumbent system context, and that (2) effective ES use mediates the impact of pre-implementation performance expectancy on post-implementation user satisfaction and, consequently, job effectiveness. Our findings provide insights into the mechanisms linking the context of using an incumbent system to post-implementation effective ES use and job outcomes, thereby integrating perspectives from technology acceptance and use, IS success, and work design.
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