Matt E. Thatcher

The Impact of Technology Investments on a Firm's Production Efficiency, Product Quality, and Productivity

For over a decade, empirical studies in the information technology (IT) value literature have examined the impact of technology investments on various measures of performance. However, the results of these studies, especially those examining the contribution of IT to productivity, have been mixed. One reason for these mixed empirical findings may be that these studies have not effectively accounted for the impact of technology investments that increase production efficiency and improve product quality on firm productivity. In particular, it is commonly assumed that such investments should lead to gains in both profits and productivity. However, using a closed-form analytical model we challenge this underlying assumption and demonstrate that investments in certain efficiency-enhancing technologies may be expected to decrease the productivity of profit-maximizing firms. More specifically, we demonstrate that investments in technologies that reduce the firms fixed overhead costs do not affect the firms product quality and pricing decisions but do increase profits and improve productivity. In addition, we demonstrate that investments in technologies that reduce the variable costs of designing, developing, and manufacturing a product encourage the firm to improve product quality and to charge a higher price. Although this adjustment helps the firm to capture higher profits, we show that it will also increase total production costs and will, under a range of conditions, decrease firm productivity. Finally, we show that the direction of firm productivity following such investments depends upon the relationship between the fixed costs of the firm and the size of the market.

Identifying Sources of Reengineering Failures: A Study of the Behavioral Factors Contributing to Reengineering Risks

Abstract:Recent experience suggests that many reengineering efforts fail, and that they fail for reasons unrelated to the technical ability of organizations to implement information systems. Our research suggests that the two principal reasons for failure are functionality risk and political risk: respectively, the organization’s inability to understand its uncertain future strategic needs, and its inability to make painful and difficult changes in response to these future strategic needs. Recent research in the organizational change literature suggests that these risks are the result of conflict among the organization’s current strategy, its espoused degree of change, the actually accepted and generally smaller degree of change, and the generally larger degree of change that would be in some sense optimal. Moreover, the conflicts among these may be unperceived or undiscussable within the organization, exacerbating the risks. We summarize in a few testable hypotheses our experience with managing the risks...

Managing the knowledge supply chain: an organizational learning model of information technology offshore outsourcing

In this paper, we present an economic learning model that helps to formalize the complex relationships among an offshoring firms knowledge levels, production costs, and coordination costs. Specifically, we model a domestic firms use of a selective offshore strategy (i.e., offshoring only a portion of its information technology activities) to exploit, through IT investments or contractual provisions, the foreign vendors large, scale-driven repository of production knowledge. We illustrate the conditions under which knowledge transfers during offshoring may reduce a domestic firms in-house production costs, leading to total cost savings in both the short term and the long term. Alternatively, when knowledge transfers are not sufficiently large, some short-lived offshoring projects may generate substantial cost savings to the domestic firm; however, long-lived offshoring projects may cause a disruption in the knowledge supply chain, resulting in substantial losses in the later stages of the project. A firm that fails to realize the costs associated with such a disruption soon enough in the project life may find itself locked into a disadvantageous offshoring agreement without any recourse. However, a domestic firm may be able to overcome a disruption in its knowledge supply chain by exploiting the learning-by-doing production knowledge generated by the foreign vendors economies of scale. The managerial implications derived from our learning model may help guide firms as they consider the impacts of offshore contracts and knowledge management investments on firm knowledge, production costs, and coordination costs.

An Economic Model of Product Quality and IT Value

We use an economic model to formalize the complex relationships among IT investments, intermediate performance measures (e.g., product quality and output levels), and economic performance (e.g., productivity, profits, and consumer surplus). We demonstrate that a profit-maximizing monopolist invests in IT (modeled as changes in parametric characteristics of the firm) to design a better-quality product and charge a higher price. While this profit-maximizing adjustment generates more consumer surplus, it also increases production costs in a way that adversely affects productivity. In contrast, a simple model extension shows that when a firm is unwilling or unable to improve product quality, then IT investments result in suboptimal improvements in profits, an increase in consumer surplus, and an increase in productivity. Together, these models highlight the way in which product quality moderates the relationship between IT investments and economic performance. We also demonstrate that these relationships are robust to the socially optimal case in which a social planner chooses price and quality to maximize social welfare. In addition, we demonstrate that the results of the monopoly model hold when considering the design and development of products offered free of charge (e.g., free online content), but that provide indirect benefits to the firm (e.g., more advertising revenues).

Understanding the Business Value of Information Technology Investments: Theoretical Evidence from Alternative Market and Cost Structures

This paper develops a series of two-stage duopoly models of quality- price competition and a series of monopoly models of quality-price choice in order to examine the impact of information technology (IT) investments on firm profit, firm productivity, and consumer welfare. We solve the duopoly and monopoly models for four cost functions, where each function makes a different assumption about the form of the marginal cost of production. These models are used to conduct a two-by-four comparison [(monopoly, duopoly) × (four cost functions)] of the impact of IT investments on economic performance. The analysis reveals that together market structure and cost structure play a critical role in determining the form of the relationship between IT investment and economic measures. Specifically, moving from monopoly to duopoly and moving from zero marginal cost to marginal cost as a function of quality increase the number of economic measures for which the directional effects of IT investment are ambiguous, or depend on model parameter values.

Modeling the IT value paradox

Assessing the value of IT investments has stumped managers and academics for years. If viewed as a commodity input, however, IT should be measured in the context in which the investment takes place.

A Learning Model of Information Technology Outsourcing: Normative Implications

We use an economic learning model to examine how knowledge parameters characterizing a sourcing relationship between a vendor and a client interact with production costs and coordination costs to affect the business value of alternative outsourcing strategies. This information is then used to determine a firms optimal rate of information technology (IT) outsourcing. We find that the optimal outsourcing rate is dependent on the ability of the outsourcing client to acquire production knowledge from its outsourcing vendor and to retain its internal coordination knowledge despite losses of fundamental production skills due to outsourcing. Specifically, when the client is unable to acquire sufficient production knowledge from the external vendor, the clients optimal outsourcing decision is to engage in either one of two extreme strategies—total insourcing or total outsourcing—depending on the rate at which the clients coordination knowledge depreciates. On the other hand, when the client is able to acquire a substantial amount of production knowledge from the external vendor, the firms optimal decision is to outsource only a portion of its IT services, where the proportion depends on the rate at which the clients coordination knowledge depreciates.

Capital One: exploiting an information-based strategy

Capital One has exploited an innovative approach to targeted marketing, based on customer profitability analysis, to achieve impressive performance as a leading credit card issuer. It is sustaining its advantage through investment in infrastructure and personnel, and through constantly improving its expertise through a practice known as test-and-learn. Moreover, it is attempting to generalize this information-based strategy to other industries.

Managing the Costs of Informational Privacy: Pure Bundling as a Strategy in the Individual Health Insurance Market

Advances in genetic testing and data mining technologies have increased the availability of genetic information to insurance companies and insureds (applicants and policy holders) in the individual health insurance market (IHIM). Regulators, concerned that insurance companies will use this information to discriminate against applicants who have a genetic risk factor but who are still healthy, have implemented genetic privacy legislation in at least 18 states. However, in previous work we have demonstrated that such legislation will have unintended consequences - it will reduce consumer participation in the market without making those remaining better off. This paper identifies a mechanism, a pure bundling strategy, that insurance companies may implement in this regulatory environment to restore (or maximize) consumer participation in the market and to discourage such discrimination among insureds. This problem is examined through System Dynamics, a simulation-based modeling technique. The results will have significant implications for policy designs implemented by insurance companies, and for legislation implemented by industry regulators, and therefore, for the insurability of the individuals that rely on this market for health insurance coverage.

Capital One Financial and a decade of experience with newly vulnerable markets: Some propositions concerning the competitive advantage of new entrants

Market share and brand recognition have historically provided advantage to established players in mature industries. The success of Capital One, an attacker in the mature credit card industry is therefore interesting, both to researchers and to executives developing strategies. A partial explanation is offered by the theory of newly vulnerable markets. The success of Capital One can be partially attributed to its application of information-based strategies to several newly vulnerable markets, allowing it to target and retain the most profitable customers. These strategies sustained double-digit return on equity and double-digit increase in sales volume and profits every year of our study.