Thrive, not just survive:enhance dynamic capabilities

of SMEs through IS competenceYi Wang

Business School, Shantou University, Shantou, People’s Republic of China, and

Xinping ShiDepartment of Finance and Decision Sciences, Hong Kong Baptist University,

Hong Kong, People’s Republic of China

Abstract

Purpose – Small and mid-sized enterprises (SMEs) are facing challenges in an increasingly fierceenvironment. This paper aims to explore the promise of information systems (IS) in enhancing thesurvival and competitiveness of SMEs in a dynamic environment. To address this issue, the paperdraws upon the dynamic capability theory and develops a research model of IS-enabled dynamiccapabilities to examine the role of IS competence for enhancing SMEs dynamic capabilities in acompetitive business environment.

Design/methodology/approach – An empirical study is conducted by using survey data fromsenior managers of 120 SMEs in China.

Findings – The analytic outcomes support the research model and confirm that IS competencesignificantly contributes to SMEs’ dynamic capabilities for gaining competitive advantage.

Research limitations/implications – This paper contributes to the literature on IS impact ondynamic capabilities of SMEs by incorporating IS competences into a research model of IS-enableddynamic capabilities and articulating the relationships between IS competences and dynamiccapabilities of SMEs in a changing business environment. The research findings enrich dynamiccapabilities theory by justifying IS as an enabling antecedent for organizational capability development.The findings may empirically convince SMEs owners and management to effectively invest in anddeploy IS for enhancing SMEs’ dynamic capabilities and performance.

Originality/value – A capability-building perspective is used to examine how IS can leverageSMEs’ capabilities to enhance their competitive advantage in a dynamic environment.

Keywords Information systems, Small to medium-sized enterprises, Communication technologies, China

Paper type Research paper

1. IntroductionFacing fierce pressure from emerging business environment, more and more small andmid-sized enterprises (SMEs) in China view information technology (IT) as one of themost relevant differentiators to compete and grow. According to the forecast of CCWResearch[1], the IT investment of Chinese SMEs will come to RMB 222.5 billion in 2010,with a growth rate of 13.1 percent compared to 2009. The increase in IT adoption andinvestment among SMEs can be attributed to two reasons. One is the popularity of IT andthe overall information literacy in the society. The other reason is the more competitivepressure faced by SMEs to survive and develop in a dynamic business environment.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1328-7265.htm

The authors acknowledge grant support from the Education Department of Guangdong(WYM09033) and Shantou University (SR09009).

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Journal of Systems and InformationTechnologyVol. 13 No. 2, 2011pp. 200-222q Emerald Group Publishing Limited1328-7265DOI 10.1108/13287261111136016

With increasing pace of globalization in China markets, SMEs have to compete withpowerful rivalries, shifting customer demands, and rapid technological advancements.One of the most critical challenges faced by Chinese SMEs is resource scarcity (Zhang andSarker, 2008). The lack of resource dramatically hinders the growth of SMEs in China,where SMEs are in a disadvantage position to access financial support from externalmarkets or financial institutions. Moreover, SMEs frequently suffer the shortages ofadequate information and managerial capabilities in changing environment. Theseweaknesses require Chinese SMEs to explore opportunities of improving theirperformance and competitiveness by taking advantage of the advancement andpopularity of IT and information systems (IS).

Whereas IT/IS has been extensively considered to play a critical role in contemporaryeconomy by transforming the way of business operations, little research examines howSMEs leverage IT/IS to enhance their competitiveness in changing environment. It isimportant to step forward to examine and disentangle the implications of IT/IS in theSMEs context, and the examination needs a fine-grained and sophisticated perspectivein which it delineates how IT/IS supports SMEs in building and leveraging dynamiccapabilities. Therefore, in this study, we address this void by taking acapability-building perspective to examine the role of IS in developing SMEs’dynamic capabilities. In particular, we propose that the essential value of IS competenceis to enhance SMEs’ capabilities of adapting changing environment.

This paper is organized as follows: literature review includes research on SMEs,IS impacts, and dynamic capabilities. A research model is developed to address the roleof IS in enhancing SMEs dynamic capabilities. The proposed hypotheses are empiricallyexamined by using the survey data from senior managers of Chinese SMEs. Discussionsgive to the theoretical and practical significance of findings, and finally, the implicationsand limitations of this research, as well as opportunities for future research arediscussed.

2. Literature reviewIT impacts on SMEsAn increasing awareness of the importance of IS in SMEs has emerged over the pastdecade (Hussin et al., 2002), and there have been two research streams addressing therole of IT in SMEs. One focuses the impacts of IT adoption in SMEs’ specific domains orfunctional activities. For instance, Levy et al. (2003) emphasized the linkage between ICTand knowledge sharing. Street and Meister (2004) conducted an action research toaddress the relationship between internal transparency, small business growth, and IS.More specifically, Fink and Disterer (2006) argue that SMEs use ICT to enable bothinternal and external interaction. Another research stream adopts a more genericperspective to highlight the role of IS in facilitating strategy implementation and overallfirm performance among SMEs. For example, IS is demonstrated to facilitate theimplementation of business strategies, synchronize supply chain operations and finallyimprove SME performance (Kuo et al., 2005). SMEs are also found to be more innovativein deploying online service to support their business operations and derive morestrategic benefits compared to a large competitor (Ray and Ray, 2006).

Findings from prior studies cumulate knowledge of the important role of IS amongSMEs. However, a few limitations exist. First, previous studies do not underpin in a solidtheoretical ground. One of the most important streams in IS research is to investigate

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the linkage between IT and firm performance (Melville et al., 2004). By viewing IT asfirm resource, scholars widely apply resource-based view (RBV) to examine IT impacton firms (Barney, 1991; Mata et al., 1995; Barua et al., 2004; Tanriverdi, 2006; Rai et al.,2006; Bharadwaj, 2000). However, the traditional RBV approach to IT as an strategicasset and the proposition of linking IT investment directly to firm performance iscriticized for its ignoring the increasing commodity-like character of IT resources(Carr Nicholas, 2003). A more appropriate theoretical basis is needed to articulateIT/IS-related constructs and consequences and to address the linkages among theseconstructs in the SMEs context.

Second, various conceptualization of IT and IT resources exist in the extant literature.This diversity in the terminology of IT constructs may obstruct the communicationamong research efforts and findings, which possibly lead to a confusion and chaos in thebody of knowledge. The research on IT impact on firms is hampered by the lack of awidely accepted conceptualization of IT/IS (Tippins and Sohi, 2003). To address thisterminology issue, research needs to introduce and conceptualize IS competence inSMEs context and identify its various dimensions. Third, previous studies examine ISimpacts from an aggregate perspective (Pavlou and El Sawy, 2006). Such generalanalysis of level may mask different effects of various aspects of IS competence in a firm.To avoid this limitation, in this study, we identify distinct dimensions of IS competenceand develop a more specific dimensions to examine the nature of the effects of variouscomponents of IS competence.

Fourth, prior research on IS impacts fail to differentiate essentials and characteristicsof SMEs compared to larger companies and identify the influential of such differences onIS impacts. The essentials of SMEs tend to be invisible in relevant research (Ballantineet al., 1999; Hussin et al., 2002). However, characteristics and unique business operationsof SMEs may much likely influence the IS competence, operational activities, andoutcomes. SMEs are typically influenced by the power of external stakeholders, such aspartners, customers, and government. SMEs’ operations and performance tend to largelyrelied upon environmental changes and conditions, such as strategic move of largecompetitors, pricing move of suppliers, changes in customer demands, or governmentpolicies (Fink and Disterer, 2006; Greene et al., 1997; Messenghem, 2003). With weakmarket power and high vulnerability to environmental changes, the most critical factorsfor SMEs success are to maintain flexibility and adaptation in changing environment.The fluent and instant information flows and effective decision making enhanced byIT/IS applications are essential for organization flexibility and adaptation (Levy et al.,2003; Pavlou and El Sawy, 2006; Street and Meister, 2004; Zhang and Sarker, 2008).Therefore, we emphasize how IS competence supports SMEs’ ability to adapt tochanging environment by drawing upon dynamic capabilities theory (DCT).

Dynamic capabilities theoryStrategic management theorists conceptualize a firm’s resources as the cornerstone ofcompetitive advantage, and RBV has become one of the most prominent theories of firmgrowth (Barney, 1991; Peteraf, 1993; Wernerfelt, 1984). RBV regards firms as heterogeneousentities with idiosyncratic resources, including intangible assets, operational capabilities,proprietary rights, technological know-how, and tacit knowledge. To be competitive, theseresources possess the characteristics of value (contributing to efficiency and effectiveness),rarity (uniqueness, not widely held or easily obtained), imperfect imitablility

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(difficulty in replication), imperfect substitutability (difficulty in fulfillment with others),and imperfect mobility (“sticky” resources). Importantly, RBV assumes that a firm hasownership of the resources to utilize and generate economic rents, and in turn, the firm gainscompetitive advantages (Barney, 1991; Wernerfelt, 1984).

RBV addresses the source of superior firm performance in competition, focusing onthe role of firm position and possession of resource advantage (Rumelt, 1997). However,these static competitive advantages are criticized as ignoring factors surroundingresources, little consideration to how resources are developed, and how they areintegrated within the firm and how they are released (Eisenhardt and Martin, 2000;Wade and Hulland, 2004). DCT extends RBV in a firm’s resource bundles, and overcomesthe shortcoming of RBV of firm’s competitive advantage in turbulent environment(Eisenhardt and Martin, 2000; Wade and Hulland, 2004; Teece et al., 1997). Dynamiccapabilities are defined as the “firm’s ability to integrate, build, and reconfigure internaland external competencies to address rapidly changing environments ”(Teece et al., 1997,p. 516), and DCT adopts a process approach to bridge firm resources and the changingbusiness environment, to emphasize resources and capabilities development, adoptionand renewal of capabilities. It is believed that a firm’s sustainable competitiveadvantages must present superiority in re-configuring its existing resources andcapabilities to adapt technology development and changing environment.

Dynamic capabilities are critical for SMEs competition and success in the businessenvironment because of their resource deficiency and vulnerability to direct and fiercecompetition. Unlike their large peers, SMEs may find impossible to regularly renew theirresource base to respond to changing environment. The scarcity of resource makes themextremely prudent in investing in new resources. Few SMEs would expand or transfertoward new business opportunities without protecting existing investment. Further, theability of adaptation is more crucial for small firms, since they are vulnerable to externalpressures and environmental changes (Wade and Hulland, 2004). Thus, dynamiccapabilities focusing on reconfiguring existing resources are especially important forSMEs.

In a dynamic business world, however, competitive resources may not hold for a longtime. With market and technological changes, companies can hardly rely on currentresources to adapt to new market demands and competition. Moreover, with theemergence of advanced and breakthrough technology and new business models,companies need to continuously rethink and modify their strategies for businesscompetition and success. According to Wade and Hulland (2004), IS resources andoperational competence may make many contributions to a firm’s dynamic capabilities,especially beneficial for SMEs operating in dynamic environment (Helfat et al., 2007).

3. Research hypothesis and modelVarious dimensions are identified as representatives for firm dynamic capabilities:coordination or integration among resources, learning, and reconfiguration,respectively (Teece et al., 1997). Pavlou and El Sawy (2006) conceptualized andoperationalized dynamic capability into sensing environment, learning, coordinatingand integrating, and empirically measured the concept at the business process level ina particular context of new product development. By synthesizing prior studies,we conceptualize the dimensions of dynamic capabilities for SMEs, consisting ofmarket responsiveness, learning, coordinating, and integrating capability.

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Market responsiveness capability refers to the extent to which a firm senses,identifies and responds to the external environment and market conditions, includingcustomer demands, competitor moves, and market trends. Most contemporary firmsimplement customer or market-oriented strategy to deal with uncertainty in thechanging business world (Pavlou and El Sawy, 2006). Organizational learning capabilityis a widely embedded process through which a firm conducts its business activities moreefficiently and effectively during repetition and experimentation to adapt toenvironmental changes (Teece et al., 1997). This capability reflects the ability toidentify information, recognize the value of information, assimilate it into businessprocess and strategic design, and utilize it to generate solutions (Cohen and Levinthal,1990; Pavlou and El Sawy, 2006).

Coordinating capability is defined as the ability to orchestrate and match variousresources and tasks, and perform activities within or across firm to capture effectiveness(Malone and Crowston, 1994). Coordination is viewed as one of the fundamentalfunctions of a firm and the main purpose of coordination is to minimize goal conflicts,adopt new procedures, and build common languages and norms (Barnard, 1938).It focuses on the reorganization of resources and tasks to generate new ways ofperforming activities (Pavlou and El Sawy, 2006). By removing barriers to information,material, and work flow among interplayed entities, firms with high coordination levelcan easily conduct strategic movements to adapt to environmental changes.

Finally, integrating capability, the ability to integrate disparate competences orresources to address rapidly changing environments (Teece et al., 1997). The fundamentaldistinction between markets and organizations is that an organization can combineindividual contribution to a joint effort (Teece et al., 1997). Firms can improve operationaland strategic performance by integrating various elements or entities with differentinterests and purposes. For example, to initiate marketing-design-manufacturingintegration, a cross-functional team is often formed consisting of members from distinctfunctional areas. Team members jointly define problems and generate solutions toachieve a common purpose. Such integration can improve firms’ ability to manage andcontrol disparate efforts into a single trajectory to fulfill the organizational business goaland then enhance firms’ flexibility in dealing with operational and strategic changes(Pavlou and El Sawy, 2006).

Drawing upon extent IT/IS literature, we construct IS competence in SMEs here withthree distinct dimensions: IT infrastructure, Business-IT knowledge alignment, andsystem integration. IT infrastructure refers to the IT hardware platform and networkshared across organizational function units. It consists of platform technology, network,and telecommunication, operating systems and core software applications. Business-ITknowledge alignment refers to the extent to which IS-related and business operationalknowledge are combined to realize IS benefits. System integration refers to the degree towhich various systems and applications, such as Enterprise resource planning (ERP)and e-commerce, are linked together for information exchange across internal functionunits and external suppliers and customers. We elaborate these three IS-relatedcompetences and their impacts on SMEs dynamic capabilities in the following sections.

IT infrastructureIT infrastructure of a firm generally refers to a set of tangible IT resources that providesa platform to enable business applications (Duncan, 1995). The basic components

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of IT infrastructure include hardware and operating systems, network andtelecommunication technologies, data, and core information processing applications(Byrd and Turner, 2001). IT infrastructure has been viewed as an effective source of value(Bharadwaj, 2000; Broadbent et al., 1999; Weill and Broadbent, 1998). IT infrastructure iscritical for daily business transactions by facilitating communications at both firm anddepartment levels, providing standards for components of IT architecture (hardware,operating systems, data exchange, communications) and ensuring security andmaintenance of firm-wide installations and applications (Broadbent et al., 1999).

Communication and information processing enabled by robust IT infrastructuremay increase the SMEs’ capabilities in responding to customer demands and marketchanges. Database-oriented applications in daily operations increase the speed toadjust production plans or product delivery based on changing demands. Also,IT-enabled improvement in processes, transactions and services is essentiallyrequired for SMEs to quickly sense and respond to customer and market needs.In addition, by enabling business process redesign, the existence of good ITinfrastructure can enhance SME adaptation and flexibility in responding to marketchanges (Broadbent et al., 1999). Thus, IT infrastructure may strengthen a SMEs’responsiveness, we propose:

H1a. IT infrastructure has positive impact on SMEs’ market responsiveness.

The success of SMEs is significantly determined by its capability of learning fromchanging environment, which essentially depends on the availability of an effectiveinformation and knowledge sharing mechanism within the firm. With the presence of arobust IT infrastructure, communication, data storage and information processing canbe fulfilled smoothly and efficiently, providing a platform upon which tremendous data,documents, information and knowledge are shared and managed within and outside thefirm. Therefore:

H1b. IT infrastructure has positive impact on SMEs’ learning capability.

IT infrastructure facilitates coordination among various entities or actors by providing acompatible and consistent platform in SMEs. First, the presence of a good network istechnical foundation for information sharing and collaboration among interplayedentities within and beyond SMEs boundary. Second, with IT applications deeplyembedded in different functional areas, SMEs managers can easily collect, process, andmonitor real-time data about business operations, and then timely make decisions aboutresource allocation. Additionally, IS applications help streamline various businessprocesses, which may coordinate and synchronize data sharing, processing, andinformation exchange. Thus:

H1c. IT infrastructure has positive impact on SMEs’ coordinating capability.

IT infrastructure enhances and supports organizational and supply chain integration.The various entities are connected closely each other based on the enhancedinformation flow and exchange upon IT infrastructure. IS applications embedded invarious functional areas further integrate inputs and outputs of business processes in afluent and seamless fashion. Thus, we propose:

H1d. IT infrastructure has positive impact on SMEs’ integrating capability.

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Business-IT knowledge alignmentBusiness-IT knowledge alignment indicates the extent to which IS-related knowledgeand skills are combined with business knowledge, skills, and operations know-howwithin SMEs. It reflects organizational ability of synthesizing competencies orresources from both business and IT domains. With the increasing use of sophisticatedIT/IS, SMEs explore the potential of IT/IS in value-adding, not just cost reduction. Thecritical factor determining the success of IS use within SMEs becomes the extent towhich IT is incorporated in business operations and strategy implementation, whichlargely depends on knowledge alignment across business and IT domains.

Such alignment of knowledge needs to be embodied in the shared knowledge amongsystems developers and IT users. Understanding business needs and business processesmay enable IT staffs to anticipate specific implementation needs better (Duncan, 1995),which help increase internal responsiveness to changes among SMEs staff(Ballantine et al., 1999; Broadbent et al., 1999). Further, the alignment may alsoenhance communications with customers. Usually, SMEs have limited customer size,rather than a few key and substantial customers. Facing changing environment, SMEsneed to be more flexible and agiler than their large competitors to provide products orservices to those customers, thus, the technical staff in SMEs must have operational andmarketing knowledge to communicate with customers, to reduce the lead time ofinformation flows, and increase responsiveness (Buonanno et al., 2005; Goodhue et al.,1992). Thus, we propose:

H2a. Business-IT knowledge alignment has positive impact on SMEs’responsiveness.

The lack of communication between IS and business operation units is often viewed as abarrier to leverage IS to support business operations (Luftman et al., 1999; Melville et al.,2004). It may be more critical for SMEs. IT/IS departments in SMEs are often small scaleand lack of experienced staffs. IT employees in SMEs have few opportunities toparticipate or deeply involve in business operations and decision makings. On the otherhand, requirements from operational employees – the end-users of IS applicationscannot be fully understood by their suppliers from IT/IS department (Tippins and Sohi,2003). The alignment of business and IT/IS knowledge through sharing and learningeach other can resolve this separation, and bridge the connections among internalemployees of IS/IT and operations, and as the alignment gradually becomes firm-wideoperational routines, organizational learning, and absorptive capabilities will beenhanced (Cohen and Levinthal, 1990; Zahra and George, 2002). Thus, business-ITknowledge alignment provides necessary conditions and facilitates organizationallearning in SMEs, we propose:

H2b. Business-IT knowledge alignment has positive impact on SMEs’ learningcapability.

Further, from operations management perspective, business-IT knowledge alignmentestablishes common understanding and effective communications channels amongIT/IS and various business units, and facilitates business process fit and resourceallocation through precise delivery and interpretation of information requirements fromoperational employees, and improves productivities of business operations and IT/ISutilization within SMEs (Goodhue et al., 1992; Tanriverdi, 2006; Zhang and Sarker, 2008).

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The alignment also improves operational effectiveness by better coordination amongorganizational units, suppliers, and customers, timely supply and delivery, and reducedinventory quantity as well as costs. Therefore, we hypothesize:

H2c. Business-IT knowledge alignment has positive impact on SMEs’ coordinatingcapability.

Overall, business-IT knowledge alignment may enhance cooperations among functionaldepartments within SMEs, and develop cooperative work culture in the firms(Luftman et al., 1999; Gold-Bernstein and Ruh, 2004). Cross-functional teams becomecommonly accepted work mode, and departmental boundary and interests are weakening,while organizational prosperity and growth become employees’ main interests (Rai et al.,2006; Reich and Benbasat, 2000). Thus, the alignment may be a firm-wide bond for SMEsto tie employees together, and integrate workforces and business operations. Thus,we propose:

H2d. Business-IT knowledge alignment has positive impact on SMEs’ integratingcapability.

System integrationSystem integration addresses the communication issues among heterogeneous andautonomous IS. Because various systems have distinct data definition, structure,semantics, data processing, and even various media including text, image, audio orvideo, it is a complicated issue to share information, services, and business processesamong IS applications in various business units and partners (Gold-Bernstein and Ruh,2004). In a non-integrated environment, IS with heterogeneous data and semantics maygenerate information or application service silos. Thus, system integration is a criticalconcern in IS management (Ballantine et al., 1999). We use system integration to reflectthe extent to which various systems and applications are tightly linked with eachother. Integration mechanisms act like a bridge among heterogeneous systems byfacilitating seamless data and information exchange (Buonanno et al., 2005).

There are several factors for considering system integration as one constructreflecting IS competence in SMEs. First, SMEs may install different IS with theirpartners. The integration between SMEs and their partners’ systems is necessary tostreamline their transactions and collaboration. For example, a small company needs tointegrate its own systems with the ERP system of its partners (Buonanno et al., 2005).Second, companies in a competitive business environment are required to continuouslyimprove business processes to adapt to changing business needs. Rather than replacinglegacy applications or systems with new ones, most SMEs concern, the sustainabilityand durability of their IS investment. Therefore, standardization, openness, andintegration of systems become most critical IS competence in SMEs (Fink and Disterer,2006). Third, large companies would like to implement most updated IS applications tostrengthen competitive position. In such situation, SMEs have little choice but to adaptto large partners’ requirements. Only those with capacity of integrating with largecompanies’ systems can stay and survive in the competition arena (Messenghem, 2003).

Consistent with prior study (Zhu et al., 2006), we operationalize system integration intotwo dimensions, internal and external integration. Internal integration assesses the extentto which various systems are interconnected with each other within an organization.External integration, also defined as inter-organizational system integration

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(Grover and Saeed, 2007), refers to the extent to which a firm’s systems or applications arelinked to business partners and customers.

System integration plays an important role in improving SMEs’ dynamic capabilities.First, by reducing incompatibility between legacy systems, an integrative systemenvironment can make IS applications more responsive to business needs (Goodhue et al.,1992), and consequently improve responsiveness of business operations. Also,integration of customer information through all possible channels makes a firmknowledgeable of changing customer demands and respond quickly to these marketchanges. For example, a SME can apply computer-aided design linked to its customers’IS to deliver fast and relevant designs. Moreover, system integration is considered arequirement for real-time enterprise (Gold-Bernstein and Ruh, 2004). Automatinginformation flow and communication across functional systems accelerate businessprocesses and reduce business cycle times. Thus, we propose:

H3a. System integration has positive impact on SMEs’ responsiveness.

Second, by dismantling information silos among different functional areas, systemintegration helps provide a freely and readily information sharing environment. Forexample, the knowledge of customer preferences can be automatically shared acrossmultiple functional areas, such as design, manufacturing, and sales department, which notonly improves specific functional operations, but also supports collaboration in generatingnew solutions (Zahra and George, 2002). Therefore, we propose the following hypothesis:

H3b. System integration has positive impact on SMEs’ learning capability.

Third, one of the original functions of system integration is to reduce manualintervention and data entry errors during connecting various systems. Data integrationis identified helpful in improving organization-wide coordination (Goodhue et al., 1992).Seamless and error-free information flow among systems and applications is critical toensuring compatibility between business processes (Rai et al., 2006). For example,integration between order entry and fulfillment systems is required to eliminate thepotential data entry errors, and then to ensure the fitness between these linked processes.Moreover, enabled by integrated systems and applications, management has access toreal-time data, and then increased ability of monitoring and managing resources onhand (Greene et al., 1997). This capacity can improve their decision making aboutresource allocation and task assignment. Thus:

H3c. System integration has positive impact on SMEs’ coordinating capability.

Finally, system integration provides a necessary technical architecture fororganizational integration. System integration within a firm enacts a sharedinformation source, functional platform, and then helps form a shared interpretationof current situation both technically and cognitively (Bhatt and Troutt, 2005). Moreover,external integration allows companies to combine and leverage external resources andefforts to benefit from collaboration advantages. We propose that:

H3d. System integration has positive impact on SMEs’ integrating capability.

Drawing up argument above, we develop a research model that conceptualizes IScompetence and addresses its implications in the SMEs context. Consistent with Bhattand Troutt’s (2005) suggestion that both the technological and managerial aspects need

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to be taken into account when conceptualizing a more inclusive view of IT capability,we conceptualize IS competence by identifying tangible and intangible and managerialparts of IS resource. Figure 1 shows the research model and presents the hypothesesthat articulate the causal effect relationships between the dimensions of IS competenceand dynamic capabilities for empirical study in SMEs context.

4. Research methodologyMeasurement of constructsTo avoid potential common method bias, we carefully revised the measurement itemsadopted from prior research and replace attitudinal items by process and action-relatedmeasurement items. We measure IT infrastructure flexibility by using three itemsassessing the availability of network infrastructure, database-oriented applicationsand cross-function IS applications, respectively (Premkumar and Ramamurthy, 1995).Business-IT knowledge alignment is measured by three items assessingcommunication, knowledge sharing, and understanding among IS and business unitswithin SMEs (Reich and Benbasat, 2000; Ravichandran et al., 2005). The two-item scaleof system integration measures the degree of online integration between databases andapplications both within and across companies (Zhu et al., 2006).

In line with the DCT and literature, the concept of dynamic capabilities is defined andmeasured with multiple dimensions (Teece et al., 1997). Based on previous empirical study(Pavlou and El Sawy, 2006), we carefully reevaluated the appropriateness of each item andrevised them to ensure the measurement tool relevant to our SMEs’ research context.Responsiveness was measured by six items, assessing firm ability of responding to newcustomer needs, identifying business opportunities, providing customized offers, accessingnew markets, introducing new products rapidly, and responding to competitors’ changes

Figure 1.Research model of

IS-enabled dynamiccapabilities

H1b

H2a

H2d

H3c

H3a

H2b

H2c

H1c

H1d

H3d

H3b

IS competences Dynamic capabilities

H1aIT infrastructure

Business-ITknowledgealignment

Systemintegration

Marketresponsiveness

Learning

Coordinating

Integrating

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(Nidumolu and Knotts, 1998; David et al., 2006). Learning capability was measured byseven items, assessing the ability of acquiring, sharing, assimilating, transforming, andexploiting knowledge within SMEs (Pavlou and El Sawy, 2006; Zahra and George, 2002).Coordinating capability was measured with five items capturing firm ability in resourceallocation, task assignment, and streamlining processes (Pavlou and El Sawy, 2006;Malone and Crowston, 1994). Integrating capability was measured by a four-item scale,assessing the firm ability to effectively collaborate and collectively manage variousactivities based on a shared interpretation of visions and goals.

Survey administrationThe survey was conducted with Chinese SMEs in Guangdong province. The draftquestionnaire in English was translated into Chinese by a bilingual academicresearcher. Both original English version of the questionnaire and Chinese versionwere sent to a bilingual IS manager to evaluate the content validity and whether therewas significant difference between two versions. The measurement items were verifiedand redefined for translation accuracy after further discussion.

After pre-testing with 20 part-time MBA students in China, we distributed refinedquestionnaires to the directors or senior managers from 200 Chinese SMEs whoparticipated in a top management-oriented training program in Shenzhen. Appendixpresents all measurement items of the questionnaire.

All informants were senior managers or directors in their companies. Theserespondents are believed to have adequately knowledgeable about the overall IScompetence and organizational capabilities of their companies. According to a surveyconducted by AMT Group[2], only 32.6 percent of SMEs in China have IT departmentdirectors to take responsibility of IT/IS development. With relative small size of SMEs,directors or general managers, rather than specific IT directors, are generally involvedin making decisions about IS investment and implementation. Therefore, directors orsenior managers in SMEs are appropriate and knowledgeable to evaluate the overall ITimpacts in their firms.

Of the 200 questionnaires distributed, 120 valid questionnaires are returned andusable for data analysis, indicating a response rate of 60 percent, which is relativehigher than typical SME survey research because of the on-site survey and supportfrom the organizer of the training program. Our sample size of 120 exceeded theminimum recommended sample size of ten times the largest number of structural pathsdirected at a particular dependent construct in the structural model (Chin et al., 2003).Table I presents the profiles of the respondents.

5. Data analysisPartial least square (PLS), a component-based structural equation modeling (SEM)method, was chosen to test the proposed research model. PLS can handle the validationof measurement model and structural model simultaneously. Moreover, PLS is moreappropriate for this research with relative small sample size. Thus, the particular PLSsoftware SmartPLS is used for data analysis in this research.

Measurement modelTo validate the quality of measurement instruments of constructs, a confirmatory factoranalysis was conducted assess the reliability, convergent validity, and discriminant

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validity of all the constructs in the model. First, construct reliability was assessed withthe PLS composite reliability estimate indicating internal consistency of constructs(Werts et al., 1974). All constructs have composite reliability scores above 0.8 in Table II,indicating the measurements are highly reliable (Straub, 1989; Nunnally andBernstein, 1994).

Second, convergent and discriminant validity is assessed by checking factor loadingsand average variance extracted (AVE) scores. Convergent validity refers to the extent towhich a set of items share a high proportion of variance in common and is estimatedbased on items loadings. Table III shows that all estimated standard loadings, except forthe item assessing understanding among IT and business units (BIKA3) and the itemassessing the responsiveness in competitors’ pricing changes (RE6), are above 0.7 andhighly significant, satisfying the recommended threshold (Hair et al., 2006; Nunnally,1978). Although the loadings for items BIKA3 and RE6 are below the recommended levelof 0.7, they are all above 0.5 and can still be considered acceptable (Hair et al., 2006).Moreover, AVEs for all constructs shown in Table II are above 0.6 indicating that thelatent construct can account for at least 60 percent of the variance in the items. Therefore,convergent validities of all constructs in the model are proved.

Frequency %

IndustryManufacturing 39 32.5Business service 39 32.5Retail and trade 16 13.3Financial service 6 5.0High technology 5 4.2Construction 7 5.8Others 8 6.7Total 120 100.0PositionCEO/director 26 21.7CIO/IT director 1 0.8General manager 88 73.3Other managerial position 5 4.2Total 120 100.0

Table I.Profiles of respondents

Construct Composite reliability ITI BIKA SI RE LE CO IN

ITI 0.92 0.80BIKA 0.83 0.61 0.64SI 0.88 0.46 0.57 0.78RE 0.91 0.40 0.48 0.44 0.62LE 0.93 0.53 0.57 0.56 0.66 0.65CO 0.92 0.57 0.56 0.49 0.61 0.76 0.69IN 0.93 0.58 0.51 0.37 0.61 0.70 0.79 0.77

Notes: ITI, IT infrastructure; BIKA, business-IT knowledge alignment; SI, system integration; RE,responsiveness; LE, learning; CO, coordination; IN, integration. Values on diagonal are AVEs

Table II.Reliability, AVE, and

correlation matrix

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Discriminant validity refers to the degree to which measures of different constructsare distinct and can be evaluated by comparing AVE for each construct with the squaredinter-construct correlations (Chin, 1998). Shown in Table II, all AVEs are larger thanthe squared cross-construct correlations, indicating that the variance explained bythe respective construct is larger than the measurement error variance (Fornell andBookstein, 1982).

To examine the presence of common method bias, Harman’s one-factor test(Podsakoff et al., 2003) was performed by loading all items into a principal componentsfactor analysis. Common method bias substantially presents when one single factorcan account for most of the covariance. No such single factor exists. Besides, we checkthe correlation matrix and find that no extremely high correlations (r . 0.90) exist.All these tests indicate that common method bias is not a big problem in our research.In summary, our measurement model satisfies reliability and validity criteria.

Hypothesis testingThe structural model and hypotheses in Figure 1 then were analyzed based on themeasurement model. The estimated path coefficients and their standard error,

Factors Items Loading t-value

IT infrastructure ITF1 0.89 * 37.49ITF2 0.91 * 46.75ITF3 0.88 * 25.95

Business-IT knowledge alignment BIKA1 0.88 * 33.49BIKA2 0.90 * 37.92BIKA3 0.57 * 5.39

System integration SI1 0.87 * 24.31SI2 0.90 * 24.06

Market responsiveness RE1 0.83 * 21.98RE2 0.83 * 25.20RE3 0.74 * 12.82RE4 0.86 * 19.51RE5 0.80 * 15.12RE6 0.65 * 8.45

Learning OL1 0.79 * 16.94OL2 0.71 * 12.44OL3 0.83 * 23.66OL4 0.85 * 30.16OL5 0.82 * 18.88OL6 0.83 * 22.80OL7 0.83 * 17.63

Coordinating CO1 0.86 * 42.19CO2 0.89 * 44.71CO3 0.82 * 20.88CO4 0.77 * 9.63CO5 0.81 * 13.90

Integrating IN1 0.88 * 29.82IN2 0.88 * 24.84IN3 0.90 * 38.88IN4 0.84 * 19.28

Note: Significant at: *p , 0.01Table III.Factor loadings

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along with t-values are shown in Table IV. The significance of each path in the structuralmodel was estimated by using bootstrap re-sampling technique. As indicated by pathcoefficients shown in Figure 2, IT infrastructure has highly significant positive effect onthree dimensions of firm dynamic capabilities: learning (0.23, p , 0.05), coordinating(0.33, p , 0.01) and integrating capability (0.42, p , 0.01). H1b, H1c and H1d are thussupported, indicating the important role of IT infrastructure in enhancing firmcapability to reconfigure and recombine the existing resources. However, H1a onresponsiveness is not supported.

Hypotheses Path coefficient t-statistics Result

H1a 0.14 1.04 Not supportedH1b 0.23 * * 2.14 SupportedH1c 0.33 * * * 3.06 SupportedH1d 0.42 * * * 3.77 SupportedH2a 0.266 * * 2.05 SupportedH2b 0.24 * * 2.49 SupportedH2c 0.25 * * 2.07 SupportedH2d 0.22 * 1.69 SupportedH3a 0.22 * 1.90 SupportedH3b 0.31 * * * 3.15 SupportedH3c 0.19 * * 2.25 SupportedH3d 0.05 0.51 Not supported

Note: Significance at: *p , 0.10, * *p , 0.05 and * * *p , 0.01

Table IV.Results of

hypotheses testing

Figure 2.PLS results of proposed

model and hypotheses

Dynamic capabilities

IT infrastructure

System integration

Business-ITknowledgealignment

Marketresponsiveness

R2 = 0.28

CoordinatingR2 = 0.42

IntegratingR2 = 0.37

LearningR2 = 0.44

0.24**

0.27**

0.22*

0.19**

0.23*

0.24**

0.25**

0.33***

0.42***

0.31***

IS competences

Notes: Significance at: *p < 0.10, **p < 0.05, and ***p < 0.01; insignificant paths are shownas dashed lines

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Table IV shows that there are significant positive links from Business-IT knowledgealignment to responsiveness, learning, coordinating, and integrating capability,respectively. Hence, Hypotheses related to business-IT knowledge alignment H2a(0.27, p , 0.05), H2b (0.24, p , 0.05), H2c (0.25, p , 0.05), and H2d (0.22, p , 0.1) areall supported.

As to the impact of system integration, three among the four proposed hypotheses aresignificantly supported. System integration is justified to have significant positive effecton responsiveness (0.23, p , 0.1), learning (0.31, p , 0.01), and coordinating capability(0.19, p , 0.05), while its impact on firm integrating capability is found insignificant.Therefore, H3a, H3b, and H3c are supported, and H3d is not supported.

Figure 2 shows the tested research with parameters to indicate model fitness.R 2-value reflects the predictive ability of the model and the independent variables’ability to explain the dependent variables. The R 2-values (0.28-0.44) are acceptable forthis explorative study. Good model fit is established with significant path coefficients,acceptable high R 2 and internal consistency being over 0.70 for each construct(Thompson et al., 1995; Gefen et al., 2000).

6. Discussion and conclusionThe findings of this research enhance our understanding of the implications of IS byexamining the enabling role of IS for dynamic capability building in the SMEs context. Weconceptually propose and empirically verify the links between IS competences and SMEs’dynamic capabilities, and disaggregate the overall IS competence into three distinctdimensions and examine their specific impacts on the dimensions of organizationaldynamic capabilities. Such disaggregate approach of IS competence shifts the level ofanalysis to components of IS competence, and allows us to identify the most relevantIS competences in enhancing organizational dynamic capabilities for competitiveadvantage. By developing and testing a conceptual research model and the relationships,we found that IS competences have in general significant and positive impacts on thedimensions of dynamic capacities, while the dimensions of IS competences influenceSMEs’ dynamic capabilities in different ways.

First, IT infrastructure significant impacts on SMEs’ learning, coordinating, andintegrating capability. This finding indicates that IT infrastructure plays afundamental role in establishing SMEs’ ability of organizing and coordinatingresources. IT platform, information network, and database-oriented core applicationsin SMEs are ultimate important components of IT infrastructure, they lie downessential basis for organizational IS competence. On the other hand, the insignificantimpact of IT infrastructure on responsiveness can be explained by the current low levelof IS applications to support customer-related functional areas, e.g. customerrelationships management (CRM), within Chinese SMEs, and that few SMEs in Chinafully utilize IS to enhance capabilities to respond market demands. While many SMEshave deployed IS applications, e.g. office automation, Material requirements planning,ERP, and Warehouse management system to facilitate managerial activities infunctional departments, the applications of IS in marketing analysis and CRM arerelatively underdeveloped (Ballantine et al., 1999). Few SMEs invest in these expensiveand knowledge intensive IS applications, because of their simple products or limitedcustomer base, and limited awareness of IS-enabled organizational capabilitydevelopment.

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Second, significant findings are evident: business-IT knowledge alignment impactson all dimensions of organizational dynamic capabilities – responsiveness, learning,coordinating, and integrating capability. The findings are consistent with the widelyrecognized important role of business-IT alignment (Luftman et al., 1999), and in line withempirical findings in larger organizations, especially from the knowledge managementperspective (Zollo and Winter, 2002). The findings confirm that business-IT knowledgealignment is common antecedents for organizational dynamic capabilities regardlessorganizational size and operational environment, and organizational-wide knowledgeresources make contributions to dynamic capabilities to adapting changing businessenvironment, and thus create sustainable competitive advantage (Sirmon et al., 2007).

Third, IS integration has been found to significantly improve firms’ dynamiccapability of responding to market changes, learning, and coordinating. These findingsjustify that IS integration in SMEs focuses on internal integration among functional unitsto standard IS operations, data and information exchange, rather than extends to externalintegration with business partners, and thus IS integration in SMEs is at the primarilyoperational level of integration, and mainly focuses on improvement of operational andtransactional costs and efficiencies (Ballantine et al., 1999), and therefore, low strategicand managerial knowledge embedded in the integration may impediment for SMEs toleverage inter-organizational system integration to enhance organizational integratingcapability (Buonanno et al., 2005).

The findings make a few academic contributions to the literature of dynamiccapabilities. First, this research justifies that DCT is the more appropriate theoreticalroot and basis than RBV for exploring the antecedents and consequences oforganizational dynamic capabilities for competitive advantage, and the findings extendthe resources bundle of RBV and dynamic capabilities for firm’s competitive advantage.As asserted, we find evidence that IS competence is one of the firm’s internal intangibleresources, it can be transformed into a firm’s capabilities to enhance competitiveadvantage, and the more important is that the capabilities are dynamic to make the firmbe adaptive to the changing environment. Because the dynamic capabilities are based onknowledge and skills of leaning, coordinating, integrating, and responding to externalenvironments (Teece et al., 1997; Sirmon et al., 2007; Zollo and Winter, 2002).

Second, this research confirms IS competence as valid concept to predict firm’sdynamic capabilities. Specifically, IT infrastructure and business-IT knowledgealignment are two firm “size-free” dimensions of IS competence, that is, thetwo dimensions are common dimensions of IS competence for both large firms andSMEs (Ballantine et al., 1999; Buonanno et al., 2005; Byrd and Turner, 2001; Street andMeister, 2004; Wade and Hulland, 2004), while the third dimension – system integrationof IS competence is sensitive to firm size. Actually, this sensitivity reflects the fact thatSMEs are poorly implemented system integration with business partners, and this“poor” IS integration may give much flexibility to SMEs – they may be unwilling to tiedwith business partners tightly, especially with powerful buyers, for being controlled,and they may strive for their paths to survive and thrive, rather than being dependentas “small potatoes” (Greene et al., 1997; Grover and Saeed, 2007; Messenghem, 2003).In addition, IS competence may be worked as a firm “size-free”: antecedent for researchon organizational competitiveness.

Practically, the research findings provide some inspirations to the owners and topmanagement of SMEs to leverage dynamic capabilities through internal upgrading

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of intangible IS resources or competence. IT/IS is effective information management toolto facilitate accurate, timely, and reliable information flows among functionaldepartments, and support strategic and operational decision making, knowledgesharing and productivity (Fink and Disterer, 2006; Kuo et al., 2005; Levy et al., 2003). To becompetitive and sustainable in a changing environment, SMEs need to have some effectivetools and approaches to enhance their capabilities to earn market niches for development.IS competence is such an effective tool for SMEs to deploy, and SMEs need to:

. Make their IT infrastructure, such as intranet, be as competent as large firms foreffective and efficient communications, information flows, and networkingamong all functional departments.

. Align organizational-wide business and IT/IS knowledge, work flows, andknowledge management tools together through IS, and routinize such alignmentas organizational policy or regulation as to make information and knowledgesharing be effective, in this way, SMEs’ innovative capabilities and growthpotential will be nurtured for competitive advantage.

. To some extent, integrate their IS with trustworthy business partners is aneffective way to develop strategic alliance for competition advantage.

SMEs can improve their organizational dynamic capabilities and strengtheningadaptation to changing business environment through IS investment. Deployment IS isultimate necessary, and the return of investment can be significantly leveraged by firm’scapabilities, and gain the competitive advantages as large counterparts. Moreover, theimportant role of business-IT knowledge alignment implies that SMEs’ managersshould focus on knowledge management through information and knowledge sharingamong employees and various operations units, providing trainings, and establishingcross-unit teamwork to develop firm’s idiosyncratic and difficult-to-imitate knowledge(Teece et al., 1997), and to integrate new knowledge both from inside and outside of thefirm to offer firm level competitive advantage (Grant, 1996).

7. Limitations and further researchThis study has several limitations that provide opportunities for future research. First,the sample size in this research may limit the generalizability of our findings, andinterpretations and implementation of our recommendations should be carefullyconsidered. Second, all the measures are subjective and provided by key informants,which may be subject to common method bias, although we have conducted necessarysteps to minimize such bias. Moreover, other factors that potentially impact firmdynamic capabilities or influence the interrelation between IS competences and dynamiccapabilities are not examined in this study. For example, environmental turbulence mayhave moderating effect on the relationships among the dimensions in the researchmodel. Future research should consider these related constructs, and examine themoderating effect on the focal constructs and relationships.

Further research can be conducted from in two ways. First, the extension of dynamiccapabilities to performance or competitive advantage can be examined in SMEs context.This study implies that IS competence will enhance SMEs’ performance throughdynamic capabilities, but empirical study is required to derive evidence to explicit theconsequence of dynamic capabilities. In addition, the moderate effect of environmentalturbulence on the relationship between dynamic capabilities and performance can be

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clarified in emerging economy or societies (Zahra and George, 2002; Sirmon et al., 2007).Second, the influence of knowledge management to dynamic capabilities through IScompetence can be included into the research model for empirical study to examineknowledge contribution (Grant, 1996; Wade and Hulland, 2004).

In summary, this study provides beneficial insights on understanding the effect ofIS on SMEs dynamic capabilities by drawing upon DCT. The empirical resultsdemonstrate the strategic potential of IS applications in improving organizationaldynamic capabilities in the SMEs context, which specify organizational ability to adaptto changing environment. Stressing the relationships between IS deployment anddynamic capabilities, this study provides both theoretical and practical contributesand paves the paths for future research.

Notes

1. Report on IT development and adoption in SMEs, CCW Research, 2010.

2. Report on status and demands of IT in SMEs, AMT Group, 2009.

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Appendix. Measurement items for constructsPlease rate the extent to which [. . .] (7-point Likert scale, 1-strongly disagree, 7–strongly agree)IT infrastructure (ITF) (Son et al., 2005):

ITF1. A computerized network infrastructure is available in y our company.

ITF2. You use database-oriented applications regularly in your daily operations.

ITF3. You have centralized IT platform for IS applications encompassing functional areas.

Business-IT knowledge alignment (BIKA) (Reich and Benbasat, 2000; Ravichandran et al.,

2005):

BIKA 1. There are effective communications between business units and IS department.

BIKA 2. Critical information and knowledge are shared between business units and ISdepartment.

BIKA 3. IT department and business units understand the working modes of each othervery well.

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System integration (SI) (Zhu et al., 2006):

SI1. There is online integration among databases and applications within your company.

SI2. There is online integration with databases and backend IS of business partners.

Please rate the extent to which your company can [. . .] (7-point Likert scale, 1–strongly disagree,7-strongly agree)Market responsiveness (RE) (Pavlou and El Sawy, 2006):

RE1. Respond to new customer needs in a speedy manner.

RE2. Frequently scan the environment to identify new business opportunities.

RE3. Tailor products/services to individual customer needs.

RE4. Enter new markets fast.

RE5. Introduce new products/services fast.

RE6. Respond to significant changes in competitors’ pricing structures.

Organizational learning (OL) (Pavlou and El Sawy, 2006):

OL1. Your company is able to identify and acquire internal and external knowledge.

OL2. Various departments and people in your company exchange information freely andfrequently.

OL3. Employees can easily access the information that they want.

OL4. There is a practical mechanism to facilitate knowledge sharing within company.

OL5. We frequently initiative brainstorm or focus group to generate new product ideas orsolutions from employees.

OL6. Your company is effective in transforming existing information into newknowledge.

OL7. Your company can successfully exploit internal and external information andknowledge into concrete applications.

Coordinating capability (CO) (Pavlou and El Sawy, 2006):

CO1. Various business processes can fit together very well.

CO2. Resources are appropriately allocated within your company.

CO3. Sharing resources is considered as a norm in your company.

CO4. Employees are assigned to tasks commensurate with their task-relevant knowledgeand skills.

CO5. There is compatibility between employees expertise and work processes.

Integrating capability (IN) (Pavlou and El Sawy, 2006):

IN1. Various department units within your company can effectively cooperate to managerapidly changing conditions.

IN2. Your company can collectively manage business activities to address situationaldemands.

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IN3. Functional departments’ goals are consistent with organizational goal.

IN4. There is a global understanding of each department’ responsibilities and businesstasks.

About the authorsYi Wang is an Associate Professor of the Business School at Shantou University in China.She received a PhD degree from Hong Kong Baptist University. Her current research interestsinclude IT diffusion and assimilation, IT business value, supply chain and logistics. She haspublished and presented articles in International Journal of Electronic Business, Journal ofShantou University (Humanities Edition), Annual Meeting of Academy of Management,and Pacific Asia Conference on Information Systems.

Xinping Shi is an Associate Professor in the Department of Finance and Decision Sciences,School of Business, Hong Kong Baptist University, Hong Kong. He is also the Director of theLogistics Management Research Center at Hong Kong Baptist University. He received a PhDdegree from Middlesex University, London. His research interests include electronic commerce;logistics and supply chain management, knowledge management, business dispute resolution,and cross-cultural business negotiation. He has published articles in Communications of theACM, International Business Review, Management International Review, Journal of ManagerialPsychology, Journal of Multi-criteria Decision Analysis, Journal of Management Systems, Journalof General Management, Journal of the Operational Research Society, and International Journalof Technology Management.

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