The impact of IT capabilities on firm performance: The mediating roles of absorptive capacity and supply chain agility

Abstract

Researchers and practitioners regard information technology (IT) as a competitive tool. However, current knowledge on IT capability mechanisms that affect firm performance remains unclear. Based on the dynamic capabilities perspective and the view of a hierarchy of capabilities, this article proposes a model to examine how IT capabilities (i.e., flexible IT infrastructure and IT assimilation) affect firm performance through absorptive capacity and supply chain agility in the supply chain context. Survey data show that absorptive capacity and supply chain agility fully mediate the influences of IT capabilities on firm performance. In addition to the direct effects, absorptive capacity also has indirect effects on firm performance by shaping supply chain agility. We conclude with implications and suggestions for future research.

Introduction

Leveraging information technology (IT) to derive competitive advantage is emerging as a top priority for firms [17], [33], [34], [81]. IT capabilities are required for efficient and effective knowledge management and change management in a firm's supply chain [42], [54], [58], [79]. However, previous empirical studies report mixed findings about the effects of IT capabilities on firm performance [54], [79]. “The role and articulation of ‘the underlying mechanisms’ through which IT capabilities improve firm performance remain unclear” ([81], p. 238). As such, scholars have called for more empirical studies on the influential mechanisms of IT capabilities especially in the supply chain context [54], [79].

The current study is an effort toward this research direction. In particular, this study explores the roles of two IT capabilities that affect firm performance, namely, (1) flexible IT infrastructure, which is a carefully planned and developed technological foundation on which present and future IT applications are built [9], [54], [60], and (2) IT assimilation, or the ability to diffuse and routinize IT applications in business processes [3]. Previous studies indicate that both flexible IT infrastructure and IT assimilation are valuable, rare, and imperfectly imitable IT capabilities that firms must acquire to prosper in a rapidly changing business environment [6], [54], [74].

Specifically, firms continue to make significant investments in IT infrastructure, facilitating the flow of knowledge and information across supply chains that, in turn, helps them maintain competitive advantage [14], [33], [61]. Given that the market has become increasingly uncertain, managers now consider creating flexible IT infrastructure as a critical capability that allows firms to achieve superior performance [56]. Thus, greater attention is given to the business value of a flexible IT infrastructure [9], [54], [56], [60]. Furthermore, previous works report that a flexible IT infrastructure alone is insufficient — it simply cannot enable firms to maintain competitive advantage [19], [48], [81]. For example, Devaraj and Kohli [19], indicate that the performance benefits of IT infrastructure investment may not be fully realized unless IT applications are actually assimilated. Practically, as an increasing number of organizational processes are becoming IT-enabled, IT assimilation is becoming essential in supporting business processes within and across organizational boundaries, thereby determining the value realized from IT applications [3], [40], [74].

Recent literature question the direct effects of IT capabilities on firm performance by contending that the effects are mediated by other capabilities [45], [49], [52], [58], [79]. For example, Wade and Hulland [74], state that “information systems exert their influence on the firm through complementary relationships with other firm assets and capabilities” (p.109). Sambamurthy, Bharadwaj, and Grover [58] posit that knowledge management and agility are two important mediators that help establish the nomological network for IT capabilities' impact on firm performance. Mithas et al. [45] further argue that IT capabilities normally affect firm performance by enabling higher-order business capabilities. Following this notion, we draw upon the dynamic capabilities perspective and investigate the underlying influencing mechanisms of IT capabilities. In particular, we follow Grant [24] and Rai et al. [52] in conceptualizing IT capabilities as fundamental capabilities that shape higher-order capabilities (i.e., absorptive capacity and supply chain agility) that, in turn, affect firm performance.

Absorptive capacity refers to a firm's ability to value, assimilate, and apply new knowledge received from external sources, such as customers, suppliers, or alliance partners [18], [42], [82]. Supply chain agility is defined as a firm's ability to effectively collaborate with channel partners to respond to market changes in a rapid manner [7], [65]. Both absorptive capacity and supply chain agility are viewed as the critical, direct sources of superior firm performance in the competitive market [15], [58], [66], [82]. A flexible IT infrastructure provides the platform that can help firms exchange knowledge, align processes, and achieve operation flexibilities, whereas IT assimilation affects the efficiency and effectiveness of business processes within and across organizational boundaries through embedding IT applications into business processes [52], [59], [79]. As such, we propose that IT capabilities (i.e., flexible IT infrastructure and IT assimilation) support the development of absorptive capacity and supply chain agility, thereby influencing firm performance. The research model is supported by data collected from senior executives in China.

The rest of the paper is organized into sections. Section 2 presents the theoretical background and hypotheses development of this study. Section 3 describes the research methodology employed. Section 4 discusses our data analysis and research findings. Finally, Section 5 presents our discussion and conclusion.