IT INNOVATION PERSISTENCE

Theophanis C. Stratopoulos Jee-Hae Lim

AndTony Wirjanto

University of Waterloo

Motivation: IT Innovation

• IT investments are the largest capital spending item

• Average IT spending among large US firms $300-500 million/year

• Average IT Innovation (Investments in new IT products and services) is $50-90 million/year

Motivation:The IT Confidence Index (ITCI)

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

+ Wall Street Journal (9/16/85) … large retail chains make strategic use of computers in their drive for competitive

advantage

Motivation:The IT Confidence Index (ITCI)

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

- Washington Post (2/1/1987), … corporate America is in the ‘throes of self-doubt and angst about the economic value’ of

investments in new IT

Motivation:The IT Confidence Index (ITCI)

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

- Financial Times (11/27/1990) … opinion surveys among top executives made the IT investment paradox painfully clear

Motivation:The IT Confidence Index (ITCI)

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

+ Minneapolis Star Tribune (12/5/1994) … computers and high tech satellite location systems helped truckers save time, fuel

and money

Motivation:The IT Confidence Index (ITCI)

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

+ Financial Times (1/8/1997) … Internet has become the number one key for gaining competitive advantage

Motivation:The IT Confidence Index (ITCI)

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

- Financial Times (3/31/2000) … IT investment are causing discontent in corporate boardrooms

Motivation:The IT Confidence Index (ITCI)

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

- Harvard Business Review (3/2003) “IT Doesn’t Matter”

Motivation:The IT Confidence Index (ITCI)

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

+ Economist (4/7/2005) … 90% of managers from around the world think that IT could still create a competitive advantage for

their firm

Motivation:The IT Confidence Index (ITCI)

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

periods of optimism, in which IT innovation is celebrated as a panacea for all business ills, followed by periods of pessimism, in which doubt prevails about the

value of investing in new IT, with persisting arguments regarding the ease with which IT can be replicated

Motivation: IT Innovation Persistence

•“Wal-Mart … was the first to computerize, the first to use wireless, the first to really deploy RFID, on which Wal-Mart is really pioneering from the retail end.

•… they adopted and adapted faster to new technology than any other retailer in the world. And you've got to give them credit for that. You've got to worry about and be troubled by some of the brutal side of their business practices. But at the end of the day … [they] … out-innovated all their competitors.”

Chanda, N. (2005) 'Wake Up and Face the Flat Earth' – Thomas L. Friedman. In an interview, columnist and author Thomas L. Friedman says globalization has outpaced its critics, YaleGlobal, 18 April 2005, http://yaleglobal.yale.edu/display.article?id=5581 Accessed on March 29, 2007.

Research Questions

1. How likely is it that a firm that has out-innovated its competitors this year will be able to repeat this performance in the following year?

2. How do fluctuations in industry-wide managerial attitudes towards IT affect the persistence of IT innovation?

3. In other words, how long does it take for a firm to acquire and develop the ability to out-innovate its competitors?

Method - Data Set

Information Week 500 (IW500): 1997-2004 … companies are evaluated in terms of their business-

technology strategies and deployment of investments in IT architecture, infrastructure, business, and e-business application. Incidentally, IT budgets are not a deciding factor in the rankings. The end result is an annual list of 500 firms that are classified as IT innovators because they have demonstrated a “consistent pattern of technological, procedural, and organizational innovation.”

Method - Data Set A sample from the list of innovators

Company 1997 1998 1999 2000 2001 2002 2003 2004APPLE COMPUTER INC 0 0 1 0 0 0 0 1BAUSCH & LOMB INC 0 1 1 1 0 0 0 0CATERPILLAR INC 1 1 1 1 0 0 1 0DEUTSCHE BANK AG 0 0 1 0 0 0 0 0DOLE FOOD CO INC 1 0 0 0 0 0 0 0HARRAHS ENTERTAINMENT INC 0 0 1 1 1 1 1 1HUMANA INC 0 0 0 0 1 1 1 1INTEL CORP 0 0 0 1 1 1 1 0NUCOR CORP 0 1 1 0 0 1 0 0OCCIDENTAL PETROLEUM CORP 1 1 0 1 1 1 1 1PROCTER & GAMBLE CO 1 1 1 1 0 0 0 0SUNOCO INC 0 0 1 0 1 0 0 0WAL-MART STORES 1 1 1 1 1 1 1 1

Non-Innovative firms are not represented in IW500.

Method - Data Set

• Criticism: “IT Innovation does not lead to sustainable competitive advantage because it is easily replicated by competitors”• Using Hoover’s Handbook, we identified up to three top competitors of comparable size for each one of the IT innovative firms in our first dataset. •Limiting our selection to direct competitors, we were able to control for size (revenue) and industry structure (SIC classification).

Method - Data Set

Table 1

Industries Sample of Firms

Agriculture Dole, Del Monte, CHS

Mineral Industries Occidental Petroleum, Halliburton, Dynegy

Construction Centex Homes, Lennar, DPR, EMCOR Group

Manufacturing Deere, Owens, Dow, 3M, Eastman Chemical, Black & Decker, Cisco, HP, Dell, Sun, Caterpillar, Procter & Gamble, Intel.

Transportation, Communication & Utilities

Duke, Ye llow Roadway, Royal Caribbean, DHL, Schneider national, FedEx.

Wholesale and Retail Trade

Wal-Mart, Tiffany, Staples, Loews, CVS, Sears, Home Depot.

Finance, Insurance & Real Estate

Cigna, Aetna, Citigroup, State Street, Fidelity, Met Life, Morgan Stanley, Humana.

Service Industries Harrah’s, Equifax, Marriot, CA, IBM, Manpower, Booz- Allen.

Method - Descriptive Analysis

Transition Probability Matrix (TPM) approach leverages the cross-sectional and time series information by describing the evolution of a cross section distribution over time.

Ft+1=P*Ft

– Ft+1 maps the distribution of IT innovativeness across firms in period t+1– Ft maps the distribution of IT innovativeness across firms in period t, and – P maps one distribution into another and tracks where points in Ft end up in Ft+1.

The TPM (P) captures information regarding the mobility of firms and the persistence of the IT innovation process. The elements of the TPM are the probabilities (pij) that a firm will move from, let’s say, the status of non-IT innovator (i) in period t to the status of IT innovator (j) in time t+1. The typical TPM will look as

€

P(X t+1 = i | X t = j) =p 1− p

1− q q ⎡ ⎣ ⎢

⎤ ⎦ ⎥

Results

First Proposition: IT Innovative firms are more likely to be

innovative in the following period

Non-IT Innovator IT Innovator Non-IT Innovator 91% 9% IT Innovator 32% 68%

Results

Results

€

yit* = γ it -1y + β1 + βsyearst

s=2

8

∑ + iα + itu ; i = 1,..,N; t = 1,...,T

Method: Dynamic Panel-Data Random Effects Probit

€

yit* = γ it -1y + xitβ + iα + itu ; i = 1,..,N; t = 1,...,T

Table 3 Estimation Results of Static and Dynamic Panel-Data Random-Effects Probit Models Static

Model Dynamic Model

Variables 1997-2004 1997-2004 1997-2000 2001-2004 yit-1 - 0.412

(0.039) 0.349

(0.126) 0.518

(0.058) y0 - 0.605

(0.055) 0.594

(0.043) 0.636

(0.063) aσ 2.141 (0.125)

0.691 (0.057)

0.747 (0.062)

0.721 (0.074) )1/(22aaσσρ+= 0.821

(0.077) 0.323

(0.036) 0.358

(0.043) 0.342

(0.040) P-value of Wald (yeaρ) 0.006 0.000 0.000 0.000 2R(McFadden) 0.101 0.225 0.176 0.182 Coρρ Pρed 1 78.2 89.0 88.4 88.9 Noteσ: A conσtant (σignificant at 1%) aσ well aσ tim e dummi eσ aρe included in each ρegρeσσion, but not ρepoρted.

Results

Results

Limitations

• Analysis based on the premise that a company’s listing in InformationWeek is a true measure of IT innovation. While InformationWeek is a well-respected and widely used source of secondary information on IT, we cannot confirm that the companies ranked in the list of IT innovators are independently evaluated each year

• Since empirical results are consistent with the anecdotal evidence offered by numerous firms in our dataset, we feel that it does not compromise the overall message and implications for managers

Implications for Research

• IT Innovation (Investments in new IT products and services) has been justified as a source of superior financial performance

• Hypercompetition = no one-time resource-related investment that can lead to sustainable competitive advantage

• If we want to analyze the sustainability of payoffs from IT innovation, we will have to start with the sustainability of the capability to innovate with IT

• Future Research: Antecedents of and Payoffs from the IT innovation capability

Implications for Managers

• Avoid investing in new IT due to pressure from peers, vendors or other external source

• If you decide that it makes sense to compete with new IT, consider this as a long-term rather than a short-term strategy

• While competing firms may be able to acquire and replicate individual IT innovations, it will take them longer to understand and copy the ability to innovate with IT over time

Implications for Managers

Early 80 Late 80s Early 90s Late 90s Early 00s Mid 00s

If you can keep your head when all about youAre losing theirs … -Rudyard Kipling

http://www.swarthmore.edu/~apreset1/docs/if.html