Lorin M. Hitt

Productivity, business profitability, and consumer surplus: three different measures of information technology value

The business value of information technology (IT) has been debated for a number of years. While some authors have attributed large productivity improvements and substantial consumer benefits to IT, others report that IT has not had any bottom line impact on business profitability. This paper focuses on the fact that while productivity, consumer value, and bush ness profitability are related, they are ultimate1 Allen Lee was the accepting senior editor for this paper. 2 An earlier version of this paper appears in the

Beyond the productivity paradox

of output produced per unit of input. While it is easy to define, it is notoriously difficult to measure, especially in the modern economy. In particular, there are two aspects of productivity that have increasingly defied precise measurement: output and input. Properly measured, output should include not just the number of widgets coming out of a factory, or the lines of code produced by a programming team, but rather the value created for consumers. Fifty years ago, tons of steel or bushels of corn were a reasonable proxy for the value of output. In today’s economy, value depends increasingly on product quality, timeliness, customization, convenience, variety, and other intangibles. Why Should We Care About Productivity?

Investment in Enterprise Resource Planning: Business Impact and Productivity Measures

Enterprise Resource Planning (ERP)software systems integrate key business and management processes within and beyond a firms boundary.Although the business value of ERP implementations has been extensively debated in trade periodicals in the form of qualitative discussion or detailed case studies, there is little large-sample statistical evidence on whether the benefits of ERP implementation exceed the costs and risks. With multiyear multi-firm ERP implementation and financial data, we find that firms that invest in ERP tend to show higher performance across a wide variety of financial metrics. Even though there is a slowdown in business performance and productivity shortly after the implementation, financial markets consistently reward the adopters with higher market valuation (as measured by Tobins q). Due to the lack of mid- and long-term post-implementation data, future research on the long-run impact of ERP is proposed.

When Online Reviews Meet Hyperdifferentiation: A Study of the Craft Beer Industry

We analyze how online reviews are used to evaluate the effectiveness of product differentiation strategies based on the theories of hyperdifferentiation and resonance marketing. Hyperdifferentiation says that firms can now produce almost anything that appeals to consumers and they can manage the complexity of the increasingly diverse product portfolios that result. Resonance marketing says that informed consumers will purchase products that they actually truly want. When consumers become more informed, firms that provide highly differentiated products should experience higher growth rates than firms with less differentiated offerings. We construct measures of product positioning based on online ratings and find supportive evidence using sales data from the craft beer industry. In particular, we find that the variance of ratings and the strength of the most positive quartile of reviews play a significant role in determining which new products grow fastest in the market-place. This supports our expectations for resonance marketing.

Price Dispersion and Differentiation in Online Travel: An Empirical Investigation

Previous research has examined whether price dispersion exists in theoretically highly efficient Internet markets. However, much of the previous work has been focused on industries with low cost and undifferentiated products. In this paper, we examine the presence of price dispersion and product differentiation using data on the airline ticket offerings of online travel agents (OTAs). We find that different OTAs offer tickets with substantially different prices and characteristics when given the same customer request. Some of this variation appears to be due to product differentiation different-OTAs specialize by systematically offering different trade-offs between ticket price and ticket quality (minimizing the number of connections, matching requested departure and return time). However, even after accounting for differences in ticket quality, ticket prices vary by as much as 18% across OTAs. In addition, OTAs return tickets that are strictly inferior to the ticket offered by another OTA for the same request between 2.2% and 28% of the time. Overall, this suggests the presence of both price dispersion and product differentiation in the online travel market.

Information Technology and Firm Boundaries: Evidence From Panel Data

Previous literature has suggested that information technology (IT) can affect firm boundaries by changing the costs of coordinating economic activity within and between firms (internal and external coordination). This paper examines the empirical relationship between IT and firm structure and evaluates whether this structure is consistent with prior arguments about IT and coordination. We formulate an empirical model to relate the use of information technology capital to vertical integration and diversification. This model is tested using an 8-year panel data set of information technology capital stock, firm structure, and relevant control variables for 549 large firms. Overall, increased use of IT is found to be associated with substantial decreases in vertical integration and weak increases in diversification. In addition, firms that are less vertically integrated and more diversified have a higher demand for IT capital. While we cannot rule out all alternative explanations for these results, they are consistent with previous theoretical arguments that both internal and external coordination costs are reduced by IT.

Information technology and internal firm organization: an exploratory analysis

This paper examines the relationship between information technology (IT) and the organizational architecture of firms. Firms that are extensive users of information technology tend to adopt a complementary set of organizational practices that include: decentralization of decision authority, emphasis on subjective incentives, and a greater reliance on skills and human capital. We explore these relationships using detailed data on work systems and information technology spending for 273 large firms. Overall, we find that increased investment in IT is linked to a system of decentralized authority and related practices. Our findings may help resolve some of the questions about the relationships of information technology to internal organization and provide insight into the optimal organization of knowledge work.

Do Better Customers Utilize Electronic Distribution Channels? The Case of PC Banking

Many service firms are pursuing electronic distribution strategies to augment existing physical infrastructure for product and service delivery. But little systematic study has been made for whether and how characteristics or behaviors might differ between customers who use electronic delivery systems and those who use traditional channels. We explore these differences by comparing customers who utilize personal-computer-based home banking (PC banking) to other bank customers. Case studies and detailed customer data from four institutions suggest that PC banking customers are apparently more profitable, principally due to unobservable characteristics extant before the adoption of PC banking. Demographic characteristics and changes in customer behavior following adoption of PC banking account for only a small fraction of overall differences. It also appears that retention is marginally higher for customers of the online channel.

Strength in Numbers: How Does Data-Driven Decisionmaking Affect Firm Performance?

We examine whether firms that emphasize decision making based on data and business analytics (“data driven decision making” or DDD) show higher performance. Using detailed survey data on the business practices and information technology investments of 179 large publicly traded firms, we find that firms that adopt DDD have output and productivity that is 5-6% higher than what would be expected given their other investments and information technology usage. Furthermore, the relationship between DDD and performance also appears in other performance measures such as asset utilization, return on equity and market value. Using instrumental variables methods, we find evidence that the effect of DDD on the productivity do not appear to be due to reverse causality. Our results provide some of the first large scale data on the direct connection between data-driven decision making and firm performance.

Costly Bidding in Online Markets for IT Services

Internet-enabled markets are becoming viable venues for procurement of professional services. We investigate bidding behavior within the most active area of these early knowledge markets--the market for software development. These markets are important both because they provide an early view of the effectiveness of online service markets and because they have a potentially large impact on how software development services are procured and provided. Using auction theory, we develop a theoretical model that relates market characteristics to bidding and transaction behavior, taking into account costly bidding. We then test our model using data from an active online market for software development services, which yields contracts for 30%--40% of posted projects. In its current format, however, the studied market may induce excessive bidding by vendors. Consistent with our theoretical predictions and those of Carr (2003), higher-value projects attract significantly more bids, with lower average quality. Greater numbers of bids raise the cost to all participants, due to costly bidding and bid evaluation. Perhaps as a consequence, higher-value projects are also much less likely to be awarded.