Journal of Management Information Systems

Volume 23 Number 2 2006 pp. 7-11

Special Section: Digital Economy and Information Technology Value

Clemons, Eric K, Dewan, Rajiv M, and Kauffman, Robert J

Eric K. Clemons is a Professor at theWharton School, University of Pennsylvania, where he has served since 1976. His visiting appointments include Harvard University, Cornell University, and Hong Kong University of Science and Technology. He serves on the editorial boards of the Journal of Management Information Systems and International Journal of Electronic Commerce. His research specialties are in the areas of IT and business strategy, IT and financial markets, making the decision to invest in strategic IT ventures, managing the risk of strategic IT implementations, and strategic implications of e-commerce for channel power and profitability. He is the past founder of the Hawaii International Conference on System Sciences’s annual Competitive Strategy, Economics and Information Systems mini-track, which will have its twentieth anniversary meeting in January 2007.

Rajiv M. Dewan is an Associate Professor at the University of Rochester’s William E. Simon Graduate School of Business Administration, where he is involved in research in electronic commerce, organizational issues in management and information systems, information technology industry, and financial information systems. He currently serves as the chair of the schoolwide doctoral program. His papers have been published in Management Science, Journal of Management Information Systems, Information Systems Research, INFORMS Journal of Computing, Decision Support Systems, IEEE Transactions on Computers, and other journals. Prior to joining the Simon School, he was a faculty member at Northwestern University’s Kellogg Graduate School of Management. He is a member of the Association for Computing Machinery, IEEE Computer Society, INFORMS, Association for Information Systems, and Beta Gamma Sigma. Dr. Dewan and two colleagues from the University of Rochester won the "Best Paper Award" in the Internet and Digital Economy Track at the Thirty-Fifth Hawaii International Conference on System Sciences (HICSS-35), January 2002. He has been organizing HICSS mini-tracks on strategy, economics, IS, and e-commerce since 1999.

Robert J. Kauffman is the Director of the MIS Research Center and Professor and Chair in the Information and Decision Sciences Department at the Carlson School of Management, University of Minnesota. He previously worked in international banking, and served on the faculty of New York University and the University of Rochester. His graduate degrees are from Cornell University and Carnegie Mellon University. His research focuses on senior management issues in IS strategy and business value, IT infrastructure investments, technology adoption, e-commerce and e-markets, and supply-chain management. His research has been published in Organization Science, Journal of Management Information Systems, Communications of the ACM, Management Science, MIS Quarterly, Information Systems Research, Decision Sciences, and other leading journals and conferences. He recently won best research paper awards at the INFORMS Conference on Information Systems and Technology (CIST) in 2003, 2004, and 2005; Hawaii International Conference on System Sciences in 2004; International Conference on Electronic Commerce in 2006; and the Eighth Information Management Conference in Taiwan in 2006. He is also a 2006 recipient of the IEEE Society for Engineering Management’s "Best Research Prize."

In this Special Section of the Journal of Management Information Systems, our authors explore new research themes and developments in the areas of digital economy and information technology (IT) value research. The first several papers represent the digital economy and IT value themes by addressing issues that arise through the outsourcing and systems design for flexibility and integration in manufacturing plant and financial services business processes. They examine how IT-driven supply-chain integration affects organizational abilities to achieve manufacturing process flexibility and competitive cost control, why IT investments make it possible for manufacturing plants to effectively outsource processes, and the role that IT integration plays in supporting high-performance import–export trade services in international banking. The next three papers examine interesting new theoretical perspectives. One is how network effects should influence firm-level business strategy for offering different kinds of value-maximizing licensing arrangements for software products. Another tackles the role of software stacks and technological complementarities when technology firms acquire other technology firms, and what our expectations should be for the consequent creation of market value. A third assesses the strategic opportunities that exist for firms to hyperdifferentiate their products when it is possible for online reviews to enable the identification of uniquely valuable product characteristics among interested high-end consumers.

The Special Section opens with a contribution to our knowledge of IT strategy in the manufacturing setting. The paper is entitled "Information Technology, Production Process Outsourcing, and Manufacturing Plant Performance," by Indranil Bardhan, Jonathan Whitaker, and Sunil Mithas. In a cross-sectional survey study of manufacturing plants, their IT capabilities, and the choices they make with respect to production process outsourcing, the authors examine the role that IT and process outsourcing play in achieving high performance in terms of plant costs and quality. They report that higher levels of IT investments are associated with a greater propensity to outsource production processes, and suggest that the systems integration capabilities are critical for this to work well for the firms. Such outsourcing also appears to be associated with some benefits; the authors report that better cost controls for plant overhead and labor expenses also result, and that higher quality results at the plant level. They also note that when a plant’s strategy is quality focused, there is a greater likelihood that process outsourcing will be observed. The authors speculate that this approach can take advantage of the core competencies of their outsourcing vendors, whose own technology investments may do more to support high quality than would otherwise be possible for the manufacturing plant. Interestingly, there is no evidence in this research that plants outsource processes simply to reduce costs. This is consistent with what is known in other research about the high costs and significant risks associated with interfirm collaboration. Overall, this research challenges other authors to pick up where it leaves off, and to establish additional new knowledge for senior managers on the rationale for and the efficacy of process outsourcing.

The second paper continues this emphasis on empirical research on IT value and manufacturing sector issues. Eric T.G. Wang, Jeffrey C.F. Tai, and Hsiao-Lan Wei present new research on "A Virtual Integration Theory of Improved Supply-Chain Performance" that also builds on our digital economy theme. The authors propose virtual integration as a governance mechanism for interorganizational interactions in supply-chain management, in lieu of other mechanisms. These include vertical integration, which is known to be inflexible in changing markets, and other forms of non-ownership-based collaboration, which may be more costly for the participants. They define virtual integration as the substitution of ownership with partnership by integrating a smaller set of suppliers through IT. They also argue that flexibility in supply-chain management is value-maximizing, and that virtual integration of buyer-supplier systems encourages the suppliers to be more responsive to the changing needs of the buyer. This study involves 149 responding firms in the automobile, chemical, computer and electronics, food, machine tool, metal, and textile industries. The authors find that although there was not a direct cost-reducing contribution for the manufacturer from virtual integration, the "loose coupling" with IT did yield benefits in terms of supplier responsiveness. The results were obtained through a structural equation model with path estimates that tested eight hypotheses.

The third paper is on IT integration in trade services business processes in international banking. Prabu Davamanirajan, Robert J. Kauffman, Charles H. Kriebel, and Tridas Mukhopadhyay contributed "Systems Design, Process Performance, and Economic Outcomes in International Banking." Their research uses the business process performance evaluation perspective for IT investments, and provides two different levels of analysis. One level is a process performance model that links system characteristics that impact business process outputs and performance quality. A second, more aggregate level of analysis is based on an economic performance model that enables senior managers to analyze the statistical connection between business process performance and the economic performance of the organization. The authors apply their modeling approach to the context of global trade services in international banking, where IT investments are made to effect systems integration to support letter of credit and lending management support. The authors’ data come from the American international banking community in New York City, during the 1990s, where historically large investments in IT were made to support international financial services business processes. The primary findings of the research include evidence for increased labor productivity and decreased cycle time in the presence of increasing electronic initiation of letter of credit-related lending requests. The authors also report that integration between the trade services system and the general ledger system in global trade services had a beneficial impact by reducing cycle time. An additional contribution of this research is that it offers new ideas about how to analyze business process-level IT investments in the presence of sequentially independent and reciprocally independent processes, as well as processes that exhibit pooled interdependence and have many shared activities.

The fourth paper in this Special Section examines technology value issues, and is by Lihui Lin and Nalin Kulatilaka. They study issues in the context of "Network Effects and Technology Licensing with Fixed Fee, Royalty, and Hybrid Contracts," especially the appropriateness of fixed fees versus royalties, which the economics literature has suggested is value maximizing for firms that license their technologies. The authors show that the usual conclusion from economics may not hold when IT innovations lead to the creation of products and services that exhibit network externalities. This problem is complicated by concerns on the part of the innovator about whether it is appropriate to license technology to competitors (such as Microsoft making some of its operating systems innovations available to Apple Computer, so that it is possible for Apple to produce Microsoft-compatible computers). Lin and Kulatilaka offer answers about the key drivers that underlie effective decisions, including the strength of the network externalities, the potential size of the market in which licensing will occur, and the investment levels required to create a similar technological innovation. They also explore the implications of current practices that have increasingly focused on developing hybrid approaches relative to managerial decision making for network externality-driven technology licensing policy.

The fifth paper in the Special Section is by Lucia Silva Gao and Bala Iyer. Their paper, "Analyzing Comple­mentarities Using Software Stacks for Software Industry Acquisitions," offers a new theoretical perspective about why firms that are closer in distance across different layers of the software stack are likely to be perceived in the financial markets as more likely to produce value and profits due to the expected technological complementarities. Their perspective is based on the economic theory of complementarities, which emphasizes the value that complementary assets and processes can produce in proximity to one another. The authors examine a number of different empirical models that implement event study methods in order to determine whether cumulative abnormal returns on equity show up among software companies involved in mergers and acquisitions. Especially interesting in this research is that the authors are able to empirically tease out the relative strength that software stack proximity has between firms whose capabilities are brought together. Based on the authors’ findings, one might guess that there is an "optimal" software stack distance in mergers and acquisitions that will support the creation of maximum business value. The authors’ findings are especially relevant in network industries, including electronic products, computer and hardware technologies, and information and communication technologies, where the use of complementary components is necessary in the creation of their products.

The closing paper of the Special Section focuses on a subject that will give good cheer to many readers of this journal: micro-brewery beer production. It also covers new theory in resonance marketing and the new possibilities for hyperdifferentiation in the digital economy. The authors, Eric K. Clemons, Guodong "Gordon" Gao, and Lorin M. Hitt, contributed "When Online Reviews Meet Hyperdifferentiation: A Study of the Craft Beer Industry." The thrust of their research is to examine the capabilities that the Internet offers to support resonance marketing, which emphasizes the degree to which consumers are well informed so they can purchase the products and services that delight them. The role of online reviews in this context is to supply consumers with "level-up" knowledge of the products that interest them, so it becomes possible for producers to hyperdiffer­entiate and better monetize what they are selling. It turns out that the craft beer industry is a perfect setting to explore these firm strategy issues, because beer is hardly a necessity and the differences among beers only become discernible to consumers as they gain experience and knowledge of the characteristics of the different products that are available. The paper contributes new ideas for the measurement of product positioning using online ratings from, a popular Internet-based consumer rating service. The authors’ empirical analysis shows the extent to which positive reviews drive the growth of demand for new craft beers, consistent with their views of how resonance marketing can make hyperdifferentiation an effective strategy.

We thank the authors of the papers that appear in this Special Section for sharing their interesting research. We also want to recognize the reviewers and participants at the 2006 Hawaii International Conference on System Sciences. They offered their knowledge and outstanding comments and insights on the theory, analysis, methods, and findings in the research that we report. We also appreciated the help of our colleagues at the MIS Research Center of the Carlson School of Management at the University of Minnesota, the Simon Graduate School of Management at the University of Rochester, and the Wharton School of the University of Pennsylvania. Donna Sarppo always contributes flawless behind-the-scenes logistics in the construction of these annual special issues--thank you, Donna. Jesse Bockstedt, now a fourth-year doctoral student at the University of Minnesota, was our "managing editor" for this Special Section project. He provided excellent reviewing input to the coeditors, helped us to be in touch with the authors, and kept the reviewers on track to meet our tight delivery schedule. Penultimately, we offer our thanks for guidance and encouragement to Hugh Watson, who annually chairs the Organizational Systems and Technology Track, and to Ralph Sprague, who has chaired the Hawaii International Conference on System Sciences for many years. Finally, we thank Vladimir Zwass, the editor of the Journal of Management Information Systems, for giving us a "blank canvas" each year on which to draw--and only after many late nights of effort, to produce this competitive strategy, economics, and information systems--focused issue of the journal.