On the contingent value of IT-based capabilities for the competitive advantage of SMEs: Mechanisms and empirical evidence

https://doi.org/10.1016/j.im.2016.05.004Get rights and content

Highlights

  • The paper analyses the use of IT in support of SMEs’ capabilities.

  • Through the capability lens, we assess the IT impact on intra-industry differential revenue and profitability.

  • Two orientations in capability building exist: external and internal.

  • External orientation in IT-based capabilities impacts more on SMEs’ performance.

  • In munificent and dynamic contexts, external capabilities impact less on revenue.

Abstract

This article assesses the value of the capabilities developed through the use of Information Technology (IT) in Small and Medium Enterprises (SMEs), by analysing whether these capabilities are a determinant of the intra-industry differential in their performance. Our work makes two principal contributions to the understanding of the value of IT. First, the article shows that externally oriented IT-based capabilities have a greater impact on the firm’s intra-industry differential in revenue growth and profitability than those capabilities focused on efficiency improvement, namely internally oriented IT-based capabilities. Essentially, this result is consistent with two facts: i) the greater importance that market and supply chain relationships have for firms with a limited scale compared to efficiency improvement, and ii) the greater social and organizational complexity captured by IT use in firm’s external relationships. Second, through a contingent perspective, our article shows that the returns of externally oriented IT-based capabilities are more likely to provide performance advantages to SMEs in contexts of low munificence and low dynamism. This evidence thus highlights that under these environmental conditions, IT is more likely to hinder than to facilitate SMEs’ ability to respond to market changes and new opportunities.

Introduction

There has long been debate on the impact that Information Technology (IT) has on firm performance. The consensus is that IT can lead certain firms to a competitive advantage and that value creation may manifest in different ways, strictly depending on the firm’s organizational and environmental context. Nevertheless, given the increasing commoditization of IT resources [1], the mechanisms of value creation from IT have not been completely understood. This is particularly true in Small and Medium Enterprises (SMEs), which face different conditions for IT use compared to their larger counterparts.

SMEs are not small versions of large enterprises, and they face higher costs for adopting and using IT compared to their larger counterparts. Because their business processes are highly idiosyncratic and less formalized, SMEs face significant adjustment costs [2] when introducing IT systems and undertaking related organizational changes in their business processes. Furthermore, because of their limited scale, SMEs may not be able to afford to develop internal resources and formalized managerial routines to govern IT assets, leading them to rely on consultants and vendors. This may reduce their opportunity to use IT as a strategic asset based on the use of rare, appropriable and non-imitable resources [3]. Finally, their limited vertical integration and low scale may lead SMEs to search for IT usage with an external orientation to improve their coordination and collaboration with external partners and their ability to enter market niches on an international scale.

An external orientation in IT use is a critical success factor for responding to market changes and new opportunities. However, this type of use requires a more complex array of managerial and organizational capabilities that is necessary when IT is used only to automate business processes and improve internal efficiency (e.g., [4], [5]), and it is thus more difficult for SMEs to master. The complexity that SMEs face in developing this use for IT is corroborated by the limited diffusion of IT solutions supporting an external orientation – such as Customer Relationship Management (CRM) tools – among SMEs, as confirmed by European statistics. Specifically, the country-level diffusion rate for such technologies for SMEs range from 7% to 33%, whereas for large firms, the same systems have among enterprises an average diffusion rate of 77% in the top 15 European nations [6].

As a possible consequence of the limited diffusion of IT systems among SMEs, their market share is shrinking [7]. Differences in their ability to use IT help to explain the increasing performance dispersion across firms [8] in those industries where IT plays a more critical role in competition, with SMEs being able to capture only a limited part of the value generated by competitive actions enabled by IT. In some industry contexts, SMEs are thus losing ground because of poor and limited use of IT resources; this raises the issue that the industry environment influences how resources are used and their role in enabling value creation. Thus, the industry environment influences the value that firms can create through these resources [9] and it is a possible moderator in the relationship between IT use and performance. In this regard, past research conducted on large enterprises has shown that IT resources play a more important role in contexts of higher uncertainty and market growth. However, SMEs can demonstrate a profoundly different response to environmental conditions than their larger counterparts. For example, past research has shown that SMEs can react to environmental uncertainty by decreasing their information processing needs rather than by processing more information (as may occur in larger firms) or that they may be unable to pursue the growth opportunities available in the external environment due to the limited availability of slack resources.

These considerations highlight the need for a better understanding of how SMEs can use IT resources for value creation depending on their environmental conditions. In this article, we enrich this understanding by integrating contingency theory logic into a Resource-Based View (RBV) interpretation of how IT use affects firm performance. We operationalize the orientation of firms’ IT use (i.e., externally or internally oriented or both) in terms of capabilities. We identify the capabilities that firms develop through the use of IT resources by relying on the notion of IT-based capabilities [10]. Furthermore, we look at firm performance as the differentials in performance that firms achieve compared to their counterparts in the same industry. This allows us to explore whether SMEs are capable of building sustained competitive advantages based on IT. In so doing, we explore the role that the rate of turbulence (i.e., dynamism) and opportunities of growth (i.e., munificence) available in the environment affects the capacity that SMEs have to build a competitive advantage from IT-based capabilities. Such environmental conditions require SMEs to develop second-order dynamic capabilities [11] and co-evolutionary adaptation processes [12] on their portfolio of resources and capabilities that are difficult to develop given SMEs’ limited organizational slacks. In the paper we describe these processes from a theoretical standpoint and we discuss the reasons why they can limit SMEs’ returns from the development of IT-based capabilities.

We explore these issues empirically by assessing a multi-industry sample of 238 Italian SMEs to determine whether: 1) an external orientation in developing IT-based capabilities has a greater performance impact than an internal orientation; 2) the effectiveness of such external orientation on SMEs’ performance differentials depends on the industry environment.

Section snippets

Background literature

This section illustrates the nature of IT-based capabilities (Section 2.1) and shows how SMEs can build economic value from their use depending on the industry environment (Sections 2.2). In so doing, we illustrate the theoretical underpinnings for how SMEs – given their unique traits – can follow different capabilities-building processes to respond to their environment compared to their larger counterparts (Section 2.3).

Hypotheses

IT-based capabilities that support SMEs’ external orientation are crucial for their competitiveness, and they are more difficult to build under certain environmental situations. In this study, we develop and test three hypotheses addressing the effectiveness of these capabilities in supporting SMEs’ competitive advantages and how dynamism and munificence in the environment affect this relationship.

Sample and data collection

The data used for this study are derived from a survey conducted on a population of 5000 SMEs between February and April 2010 in the Piedmont region in Italy. The survey is part of the output of a regional research observatory of the Information Society that has been conducted every year since 2005. These data were complemented by financial data gathered from the AIDA database (Bureau Van Dijk), which includes financial measures for all Italian companies.

Located in Northwest Italy, the Piedmont

Descriptive statistics

The descriptive statistics (Table 7) indicate that SMEs are more likely to develop internally oriented than externally oriented IT-based capabilities. This result is consistent with the greater organizational and social complexity that firms must address when they use IT to develop externally oriented IT-based capabilities. Specifically, the score for internally oriented IT-based capability was significantly higher than the score for the aggregate measure of externally oriented IT-based

Discussion and conclusions

With the increasing commoditization of IT solutions, this study is relevant because it examines the value that stems from SMEs’ attempts to develop capabilities based on IT use. For this examination, we used the RBV and a contingent approach to analyse how IT-based capabilities influence firm performance in SMEs and how environmental factors influence this relationship. In this way, our empirical research can contribute to the debate on how and in which contexts IT investments provide more

Acknowledgements

The authors acknowledge the support of the European Community through a Marie Curie Intra-European Fellowship by providing funds to one author of the paper. The authors also acknowledge the ICT Observatory of the Piedmont Region for the data provision.

Paolo Neirotti is Associate Professor at the Politecnico di Torino (Italy), where he teaches Strategic Management. His research interests are in the field of the strategic value of Information Technology (IT), and the transformations IT produces on industry structure and business models.

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  • Cited by (0)

    Paolo Neirotti is Associate Professor at the Politecnico di Torino (Italy), where he teaches Strategic Management. His research interests are in the field of the strategic value of Information Technology (IT), and the transformations IT produces on industry structure and business models.

    Elisabetta Raguseo is a post-doc Marie Curie research fellow at the Business School Grenoble Ecole de Management (France). Her research interests refer to the strategic value of Information Technology (IT), with a focus on data management in business.

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