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Objective and main results

This article investigates how IT strategy and IT investments influence profitability and the market value of the firm. IT strategy refers to the dominant strategic objective that the firm emphasizes, which can be revenue expansion, cost reduction, or a dual emphasis in which both goals are pursued.

Findings:

• Firms with a dual IT strategic emphasis have a higher market value than firms with a revenue or a cost emphasis, but they have similar levels of profitability.
• IT strategic emphasis moderates the relationship between IT investments and firm performance. Dual-emphasis firms have a stronger IT–market value relationship than revenue-emphasis firms.
• The relationship between IT and profitability is stronger for firms pursuing a dual IT strategic emphasis than for firms with revenue or cost emphasis.

Summary of practical implications

A dual or revenue emphasis pays off in terms of firm valuation. Managers should therefore consider the market value implications of their IT strategic choices, even if they do not appear to affect profitability. 

Firms pursuing cost reduction and revenue expansion simultaneously may benefit (both in terms of market value and profit) from high IT investments. At low levels of IT investment, however, firms may need to choose between revenue expansion and cost reduction, as the primary IT emphasis. 

The authors argue that managers should choose a portfolio or combinations of appropriate IT applications that are consistent with their strategic objective. In other words, managers need to synchronize their IT strategic emphasis with related IT applications to achieve their strategic objectives.

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Tags

Firm performance IT investments