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1. Team Topaz
INFORMATION TECHNOLOGY
AND FIRM PROFITABILITY

2. Introduction
1 Revenue-Generating IT Projects
2 Cost-Saving IT Projects
3IT Expenditures vs. Advertising and R&D
4 Research Method
5 Question and Answer Session

3. Purpose of Paper
• Answer three questions:
– Do IT investments affect firm
profitability?
– How do IT-enabled revenue
growth and IT-enabled cost
reduction compare in terms of
their relative impact on firm
profitability?
– How does the effect of IT on
profitability compare with that
of advertising and of research
and development?

4. “Senior Managers should give higher
priority to revenue-enhancing IT
projects for superior firm
performance.”

5. Revenue-Generating IT Projects
• IT Investments
generate IT growth
through in three ways:
– New value propositions
– New marketing and
sales channels
– Improved management
of the customer life
cycle

6. New Value Propositions
• Customer Relationship
Management Applications
• Better understanding of
unfulfilled and evolving
customer needs
• Capturing and making use
of customer knowledge for
better design, demand
forecasts, manufacturing,
delivery, cross-selling
opportunities, and
fulfillment

7. Example of New Value
Proposition (Amazon.com)

8. New Marketing and Sales
Channels
• IT systems allow firms
to target customers
through IT-enabled
channels such as:
– E-mail
– Short messaging
systems
– Websites
– Targeted databases

9. Improved Management of
Customer Life Cycle
• Increased contact and
closing rates
• Improved customer
retention, customer
knowledge, and
customer satisfaction
• higher customer
satisfaction leads to
higher loyalty and
willingness to pay

10. “Because revenue-generating projects are more
difficult for competitors to replicate, firms are
more likely to differentiate themselves and find a
niche based on revenue-generating IT
capabilities than on cost-saving IT capabilities.”

11. Sustainable Competitive
Advantage
• Revenue-Generating IT
Projects lead to sustainable
competitive advantage
• Examples:
– More firm specific because
they align with downstream or
customer facing processes
– databases of customer
profiles and transactions
– Reconfiguration of business
processes
– Critical information about
revenue-enhancing IT
projects is rarely publicly
available
– Likely to have stronger and
more enduring effects on
competitive position than cost-
saving IT projects

12. Examples of Revenue-Generating
IT Uses
• Dell
– Makes use of IT social media
to engage employees and
customers (IdeaStorm and
EmployeeStorm)
– Embedded feedback into
business processes and
improve its customer resource
life-cycle management
• Southwest
– created an integrated system
to form extensive links among
customers, employees, and
other airlines

13. “Firms reap greater profitability gains
from revenue-enhancing IT projects
than from cost-saving IT projects.”

14. Cost-Saving IT Projects
• Reduce or avoid:
– Operational costs
– General and
Administrative
Costs
– Customer
Acquisition and
Marketing Costs

15. Reducing or Avoiding Operating
Costs
• Improved efficiency of
operational and supply
chain processes by
supporting lean
transformational efforts
• Higher productivity and a
YOUR NAME HERE reduction in inventory and
cycle times
• Better information sharing
and tighter coordination in
supply chain relationships

16. Reducing or Avoiding General
and Administrative Costs
• Lowers employee and
customer support costs
through the implementation of
self-service technologies
• Facilitate sales and related
transactions, such as ordering,
payment, and exchange
through which customers can
transact and get support
without human intervention
• Allow customers to perform
certain tasks on their own
(e.g., entering data about their
orders), thus reducing labor
costs and freeing time to plan
and optimize other costs

17. Reducing or Avoiding Marketing
Costs
• The cost of sending messages
through electronic media such
as e-mail, short messaging
systems, and social media is a
fraction of the cost of
traditional advertising channels
(e.g., television, direct face-to-
face marketing)
• Internet-based applications,
websites, click-stream data,
and user profiling technologies
make the costs of capturing,
maintaining, and integrating
different sources of information
to target consumers
comparatively lower

18. Walmart’s Use of IT to Reduce
Costs
• Investing in the RetailLink
system enabled Wal-Mart to
be tightly linked with its
vendors, providing them with
frequent, timely, and store-
specific sales information
• This information system has
led to quick turnaround times
for Wal-Mart and has driven
labor and inventory costs down

19. Key Differences Between Revenue-
Generating and Cost-Saving Projects
Revenue-Generating IT
Cost-Saving IT Projects
Projects
Part of organization most
Customer-facing operations In-house firm operations
effected
Effect on Firm Profitability Much greater May be much smaller
Reconfiguration of Business
Can be a profound change May be minimal
Processes
Ease of Replication from
More difficult to replicate Much easier to replicate
Competitors
Less Firm-Specific
Specificity of projects Firm-Specific (automation tools purchased
from vendors, etc.)

20. “Revenue-enhancing IT projects have
a more pronounced effect on
profitability than advertising and
R&D.”

21. IT Expenditures vs. Advertising
• Can help firms reach
customers more effectively
and at less cost
• IT investments can influence
business processes that
encompass both digital and
non-digital channels of
communication
• Can allow a firm to engage a
wider range of stakeholders
• Difficult for competitors to
imitate

22. Vanguard Example of IT
Expenditures
• Focus on Internet related
technologies to forge ties with
clients
• Over the years, Vanguard’s IT
investments portfolio has
expanded to include:
– Live webcasts
– Chats
– Blogs
– iPhone applications
• Grew its assets from $580
billion to $1.4 trillion, much of
which has been driven by IT
investments

23. IT Expenditures vs. Research &
Development
• Even in the most intensive
R&D industries such as the
pharmaceutical and
biotechnology industries, IT
investments play a critical role
in revenue generation
• Wyeth example (recently
acquired by Pfizer)
– invested significantly in IT to
support its R&D
– These investments enabled
virtual teams from different
business units around the
world to collaborate in
research and to develop new
drugs

24. Relative Effects on Profitability
(Fixed Effect Models)
Effect on
Profitability
1.912
IT
(0.603)
1.001
R&D
(0.083)
.155
Advertising
(0.287)
Observations 276
Number of
86
Firms

25. Research Method
• Used a large sample of more
than 400 global firms over a
period of six years (1998–
2003) to test the conceptual
model
• Conduct an empirical
investigation using archival
data collected by one of the
largest international research
firms well known for its IT data
and research services
• The research firm collected
firm-level IT investment data,
along with other IT investment-
related information, as part of
its annual worldwide IT
benchmarking survey

26. Limitations of Research Method
• The study uses data on large
global firms, which limits the
generalizability of the findings
• Study was only conducted at the
firm level; there is still a need to
conduct such an analysis at the
business unit level and project
level
• There remains a need to verify the
generalizability of the findings in
other contexts and time periods
(there was a Stock Market boom
and bust between 1998 and 2003)
• While the study suggests that the
effect of IT on profitability is
mediated through sales growth,
we cannot pinpoint whether the
sales growth is because of higher
volumes or higher margins

27. Question and Answer Session
1. Who are the authors? (Not just
names)
2. What is the stated purpose of the
article?
3. Who is the audience?
4. Does the literature review seem
reasonable? Does it encompass
enough literature?
5. Does the article structure make
sense?
6. Were the authors successful in
accomplishing their stated
purpose?
7. Does this mean anything at all to
you? Is this article worthless to
practitioners? Why? If it does
have value? What is it and why?

28. Who are the Authors?
Sunil Mithas
•Associate Professor in Decision, Operations and
Information Technologies Department.
•Robert H. Smith School of Business at University of
Maryland
•Earned Ph.D. at the Ross School of Business at
University of Michigan
Ali Tafti
•Assistant Professor of Business Administration
•College of Business, University of Illinois
•Earned Ph.D. in Business Administration at
University of Michigan

29. Who are the Authors? (cont.)
Indranil Bardhan
•Associate Professor of Information Systems and
Operations Management
•Naveen Jindal School of Management, University of
Texas at Dallas
•Earned Ph.D. in Management Science and
Information Systems from the McCombs School of
Business at the University of Texas at Austin
Jie Mein Goh
•Professor of Information Systems and Information
Technology & Innovation
•IE Business School in Madrid, Spain
•Earned Ph.D. at University of Maryland College Park

30. Question and Answer Session
(cont.)
2. Who is the audience?
3. Does the literature review seem
reasonable? Does it encompass
enough literature?
4. Does the article structure make
sense?
5. What is the stated purpose of the
article?
6. Were the authors successful in
accomplishing their stated
purpose?
7. Does this mean anything at all to
you? Is this article worthless to
practitioners? Why? If it does
have value? What is it and why?

31. What is the Stated Purpose
in this Article?
“The goal in this study was to examine the
effect of IT investments on profitability and
the extent to which the effect of IT on
profitability is mediated through revenue
growth and cost reduction.”

32. Does this Article Have Value and
Why?

33. Summary
• Senior Managers should give
higher priority to revenue-
enhancing IT projects for
superior firm performance
• Because revenue-generating
projects are more difficult for
competitors to replicate, firms
are more likely to differentiate
themselves and find a niche
based on revenue-generating IT
capabilities than on cost-saving
IT capabilities
• Firms reap greater profitability
gains from revenue-enhancing
IT projects than from cost-
saving IT projects.
• Revenue-enhancing IT projects
have a more pronounced effect
on profitability than advertising
and R&D.