The Quest for Competitive Agility:
Redefining the Role of IT as an Options Generator
V. Sambamurthy
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
(301) 405-8645
smurthy@rhsmith.umd.edu
Anandhi Bharadwaj
Goizueta Business School
Emory University
Atlanta, GA 30322
(404) 727-1184
Anandhi_Bharadwaj@bus.emory.edu
April 2000
The Quest for Competitive Agility:
Redefining the Role of IT as an Options Generator
Abstract
The landscape of competitive actions among contemporary business firms is
characterized by an emphasis on competitive agility. The actions of successful firms
provide strong evidence that IT significantly enhances competitive agility. In their quest
for competitive agility, firms are increasingly relying on the information systems,
including the Internet suite of technologies, process technologies, and knowledge
technologies. However, not much is understood about how IT capabilities and
investments facilitate competitive agility. This paper draws upon the theory of strategic
options to conceptualize the role of IT as an options generator and articulates
propositions linking IT investments, organizational capabilities and competitive agility.
Specifically, the paper identifies the role of IT in building and striking strategic options
and enabling higher levels of competitive agility. The paper also identifies the different
types of IT-intensive options that are at the heart of a firms’ ability to be agile. In
addition to introducing a redefined perspective on the role of IT in organizations in
information-intense business environments, the paper should also stimulate future
research around the propositions derived from the model.
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The Quest for Competitive Agility:
Redefining the Role of IT as an Options Generator
“Every time I make a decision, I strive to choose the path that is the most flexible,”
says Rawson Groves Hobart, CIO of Peet’s Coffee & Tea. Agility is helping Peet’s, a
50-shop, $60 million outfit in Emeryville, California, take aim at the industry’s 900pound gorilla, $1.3 billion Starbucks. “We are constantly moving forward with
various initiatives, but as we proceed we’re constantly thinking of ways to leave
doors open to expanding or changing whatever it is we’re implementing,” says
Hobart. “Agility has become one of our main points of differentiation.”
Most contemporary firms share the realization of Peet’s Coffee & Tea that
competitive agility has emerged as a critical organizational capability and an imperative
to sustained business success. Competitive agility is the ability to execute multiple
competitive moves in the form of innovative products, services, pricing arrangements,
distribution channels, and organizational structures and processes with speed, surprise,
and disruption (Goldman, Preiss, and Nagel, 1995; D’Aveni, 1994; Christensen, 1997;
Byrnes and Judge, 1999; Venkatraman and Henderson, 1998). Agile firms quickly and
effectively sense the emerging shifts and discontinuities in their product-market spaces,
assemble the needed resources to innovate new competitive solutions, and change
directions in short order while leaving themselves options to pursue other paths. These
firms act as arbitrageurs in leveraging market imperfections to their own favor and
competitive advantage (Jacobson, 1992). The repertoire of actions by successful firms
such as Charles Schwab, Dell, and FDX exemplify the significance of agility in
maintaining superior business performance in contemporary business environments.
Information and information technologies play a vital role in the development of
competitive
agility
as
an
organizational
capability
(Goldman
et
al.,
1995).
Advancements in the functionalities of information, communication, and content
technologies have made it feasible for firms to unbundle information from physical
3
products, services, distribution channels, and intermediaries. Unbundling enables firms
to redefine their value-added relationships with customers (e.g., Dell’s direct online
business model), launch new business solutions primarily around information (e.g., GM
and Ford’s moves with B2B intermediaries, such as Commerce One and Oracle), disrupt
industry boundaries and challenge new competitors through information-based
competitive moves (e.g., Amazon). Therefore, significant investments are occurring in
an array of information technologies, such as e-commerce technologies, customer
relationship management systems, ERP systems, data warehousing and data mining,
and knowledge management technologies. Evidence is mounting that such investments
have a significant relationship with superior business performance (Bharadwaj,
Bharadwaj, and Konsynski, 1999; Hitt and Brynjolfsson, 1996). At the same time, the
managerial ability to blend these investments with business processes, knowledge, and
relationships is also recognized as vital to business success (Bharadwaj, Sambamurthy,
and Zmud, 2000; Feeny and Wilcocks, 1998). As Keen (1999) suggests, the emerging role
of IT is to facilitate competitive agility by enhancing firms’ ability to execute newer
business models with speed and superiority.
However, there are two shortcomings in the current state of our knowledge
regarding the linkages between IT and firm performance. First, the frameworks of
industry structure mostly guide models of competitive use of IT (Porter, 1980; Porter
and Millar, 1985; Clemons and Row, 1991). These models assume perfect knowledge
about the bases of competition and direct attention toward the linkage of IT resources
and specific value chain activities to create competitive advantage through price,
product, or service differentiation (Sambamurthy, 2000).
However, competition in
contemporary business environments exhibits the characteristics of Schumpeterian
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economic logic of creative destruction: firms operate with the handicap of imperfect
knowledge about their competitors and prospective threats and opportunities.
Therefore, according to this logic, entrepreneurial actions by firms resulting from market
insight, trial-and-error learning, and experimentation result in strategy being a dynamic
process of offensive and defensive competitive moves.
The logic of IT-based
competitive strategy must be reoriented toward these new theoretical underpinnings of
strategy that are appropriate for competing in hypercompetitive business environments
(Sambamurthy, 2000). Second, though IS researchers have demonstrated significant
relationships between IT investments, IT capabilities, and firm performance, not much
attention has been devoted toward a theory that explains the complex and unfolding
interconnections among them. There is a need to further answer questions such as: How
do IT investments facilitate superior firm performance? What are the processes through
which firms create IT-based resources that lead to superior firm performance?
Our goal is to address these shortcomings by developing a theoretical model that
better explains how IT enhances competitive agility in contemporary business firms.
Specifically, we draw upon concepts from strategic options theory to espouse the role of
IT as an options generator for building competitive agility as an organizational
capability. As an options generator, we conceptualize that the role of IT management to
be to provide a business platform that facilitates the launching of a multitude of
competitive initiatives. We define this business platform in terms of strategic options:
infrastructure capital, process capital, knowledge capital, relational capital, and digital
capital.
Drawing upon theory and empirical evidence from the strategy and IT
management literatures, we develop propositions to describe how IT investments and
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managerial ability facilitate the building of these options and their utilization in
enhancing competitive agility.
The next section draws upon contemporary theory in business strategy to describe
the role and importance of competitive agility.
Next, we draw upon the strategic
options theory to present our conceptual perspective on the role of IT as an options
generator. Subsequently, we present our theoretical model and propositions. Finally, we
trace some of the implications of our theorizing for thinking about effective IT
management practice and shaping future research.
Competitive Agility: An Important Capability for Hypercompetitive Environments
Scholars of competitive strategy agree that the contemporary realities of business
strategy have their roots in the Schumpeterian perspective (1934; 1950) of
microeconomic theory. This theory directs attention toward strategy as a dynamic
process of creative destruction and disruption of existing product-market spaces.
According to the Schumpeterian theory, firms operating in complex and turbulent
markets possess imperfect knowledge and information about customer preferences
(Hayek, 1937).
Firms seek newer knowledge and understanding of their markets
through experimentation, discovery, insights, and learning. New knowledge enables
the firms to sense imperfections between how the market currently operates and what
could be done differently in disrupting the established recipes for competitive conduct
and satisfaction of customer needs. Armed with the knowledge of how markets could
be disrupted, entrepreneurial firms attempt to seize competitive advantage through
innovative products, services, channels, or alliances. In the short run, entrepreneurial
firms reap supernormal returns as established incumbents and rivals seek to understand
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the competitive disruptions in their marketspace and mobilize appropriate response
actions (Christensen, 1997).
Though the response speed might vary, eventually
incumbents or other imitators will be able to acquire the necessary knowledge and
dissipate away the supernormal returns accruing to the pioneer. Alternatively, other
pioneers might generate fresh knowledge about the markets and launch their own
disruption actions to overturn the pioneers’ advantages. Thus, competition unfolds in
the form of a series of market disruption moves by new entrants or entrepreneurial firms
and efforts by incumbents or rivals to shape their response actions (Young et al., 1996;
Smith, Grimm, and Gannon, 1992). Strategy becomes a dynamic process of competitive
moves and action responses. As D’Aveni (1994) suggests, the logic of business strategy
is to capture fleeting positions of competitive advantage through a string of competitive
moves and responses. In the long run, superior performance flows not from the success
of a specific competitive move, but from the continual entrepreneurial actions.
Therefore, strategy should be viewed as a process of sensing market imperfections,
assembling the requisite assets, knowledge, and competencies to devise competitive
moves, and mobilizing the commitment and resources to execute these moves. Overall,
what matters most is a firm’s ability to generate competitive moves with speed and
surprise (D’Aveni, 1994; Goldman et al., 1995).
In a hypercompetitive business
environment, agile firms capture fleeting positions of competitive advantage through a
variety of competitive moves.
Consistent with existing conceptualizations of competitive agility (cf., Ferrier, Smith,
and Grimm, 1999; Young, et al., 1996), we operationalize competitive agility in terms of
the level and variety of competitive moves.
Level refers to the number of competitive
moves initiated by a firm either to attack its rivals’ positions or to defend attacks from
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current and prospective rivals. Variety refers to the breadth or range of competitive
moves, including new product or services introductions, pricing changes, changes in
distribution channels, and implementation of new market-oriented strategic alliances.
Strategic management literature suggests that both the level and the breadth of a firm’s
repertoire of competitive actions have a significantly positive relationship with firm
performance (Ferrier et al. 1999; Young et al., 1996).
IT as a Platform for Competitive Agility
How does IT facilitate the development of competitive agility? Venkatraman and
Henderson (1998) describe three fundamental vectors of organizational activity through
which IT could facilitate agility: customer relationships, sourcing agreements and
strategic alliances with external partners, and the leveraging of expertise across the
enterprise.
Advancements in the functionalities of information technologies enable
firms to create novel options for organizing each one of these vectors and escalate their
agility. Dell’s direct business model illustrates the role of information technologies in
enhancing agility through customer relationships and alliances with external partners
(Magretta, 1998).
Evans and Wurster (2000) argue that firms have traditionally constructed their value
chains and inter-organizational relationships by bundling information and physical
products and services into integrated structures. However, information technologies are
enabling most firms to deconstruct their value chains and inter-organizational
relationships by unbundling information from physical products and services.
Additionally, firms are moving information value chains to the forefront of their
strategic moves (Bradley and Nolan, 1998; Hagel and Singer, 1999). Firms such as
Charles Schwab, Quicken, and Autobytel demonstrate the role of information
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technologies in deconstructing the traditional value chains and building their agility
through creative management of the information value chains.
Sambamurthy (2000) argues that IT is deeply embedded into the strategic levers that
undergird a firm’s competitive agility: processes, knowledge, and relationships. Not
only does IT enhance the value of each one of these levers, but it also shapes novel
combinations of these levers in the pursuit of innovative products, services, and
distribution channels. Grant (1995) describes a hierarchy of organizational capabilities,
where specialized capabilities are integrated into higher order organizational
capabilities. Viewed from this light, competitive agility can be regarded as a higher
order capability that is fundamentally enabled in contemporary businesses through
investments in information technologies. However, there is a need for theorizing the
exact manner in which firms can leverage the functionalities of IT in enhancing their
competitive agility. Our paper supplies this connection by drawing upon the theory of
strategic options and conceptualizing the role of IT as a strategic options generator.
IT as Strategic Options Generator
Options theory was originally developed for the accurate valuation of financial stock
options and was subsequently expanded to cover investments in other organizational
resources (Amram and Kulatilaka, 1998).
Options represent the rights to future
investment choices without a current obligation for full investment. The holder of an
option typically makes a small initial investment, holds it open until an opportunity
arrives, and then exercises a choice to strike the option to capture the value inherent in
the opportunity. The value of holding an option becomes magnified especially when the
options holder has preferential advantages in exploiting the opportunity as opposed to
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those who not hold those options. Thus, when path dependencies in the form of prior
learning, investment, or experience guide the prospects for exploiting emergent
opportunities, the holding of options is economically advantageous.
Options theory provides a powerful lens for viewing strategy as a process of
strategic choices about an unknown and unpredictable future, where agile firms must be
ready to marshal their capabilities and resources to rapidly innovate new business
models, products, services, and other business arrangements (Bowman and Hurry, 1993;
Williamson, 1999).
Specifically, options theory draws attention to strategizing in
hypercompetitive business environments characterized by dramatic complexity and
turbulence. Table 1 illustrates the connections between options theory and some of the
existing behavioral theories about strategy making under uncertainty.
Competitive
agility requires strategizing through improvisation and learning. Improvisation is the
process of executing strategic moves by drawing upon existing knowledge and
resources with speed, surprise, and disruption. Options theory regards options as the
valuable, rare, and inimitable resources that confer the ability to execute strategic moves.
A firm’s options bundle strengthens its ability for competitive action and cushions the
downside risk of future investments. Options therefore underlie the ability of the firm
to act as an arbitrageur that recognizes strategic opportunities in an imperfect market
and executes moves to seize those fleeting positions of competitive advantage.
The IT-based Options Bundle
We define the IT-based options bundle as the organizational infrastructure that
underlies competitive agility. The concept of IT-based options bundle is analogous to a
platform investment that provides growth options for the future (Kogut and Kulatilaka,
1994). Based on our arguments that advancements in the functionalities of information
10
technologies have significant implications for competitive agility, we regard these
options to be the product of a tight coupling between appropriate information
technologies and the strategic resources of the firm. Further, our conceptualization of
strategic options is rooted in earlier conceptualizations of knowledge, process, and
relationships as levers for shaping and executing strategy (Scott Morton, 1991; Lawler,
1996).
Our conceptual model identifies five distinct types of IT-based options: IT
infrastructure capital, IT-enabled process capital, IT-enabled knowledge capital, ITenabled relational capital, and digital capital (see Table 2). Each one of these forms of
capital represents a distinctive firm endowment. We also argue that individually, and in
combinations, these forms of capital enhance competitive agility.
IT Infrastructure capital refers to the ability to assemble different technologies and
IT products and services into an integrated platform that not only provides economies in
the cost of ownership, but also ensures appropriate scalability to the future business
opportunities for growth and flexibility. Drawing from the work of Keen (1991) and
Weill and Broadbent (1998), we conceptualize three dimensions of IT infrastructure
capital: scalability, flexibility, and reliability. Scalability refers to the capacity for global
reach and responsiveness to future business volumes for transaction support. Flexibility
refers to the ability to provision different types of IT services and to be able to connect
different applications and business partners without being impeded by architectural
incompatibilities. Reliability refers to the provisioning of IT services with high levels of
redundancy, error logging, audit trails, and uninterrupted services (7x24 availability).
The implications of poor reliability of services can be profound. For example, when
Ebay’s site went down for about twenty-two hours, the firm lost a market capitalization
11
of $5.7billion in two days, proving that IT architectural mistakes can have serious
consequences. In order to improve system reliability, Ebay has subsequently increased
its IT investments several fold and bought substantial server capacity.
The scalability, flexibility, and reliability of the IT infrastructure describe the strength
of a firm’s IT infrastructure capital. Competitive agility is likely to be higher with
stronger IT infrastructure capital. When firms execute new competitive moves, their
speed and surprise would be hampered if they had to re-architect their IT infrastructures
for each move. Agility is enhanced when the necessary functionalities can be quickly
added to the existing IT infrastructure. As an example of the value of IT infrastructure
capital, in 1999, when Toysmart.com decided to include baby products in their product
line, they moved from the idea stage to actual execution in sixty days, expanding their
product base from 20,000 to over 70,000 items. In the words of their chief E-Commerce
officer, “we focus on [in our IT infrastructure] inherent scalability, reliability, and
flexibility in our systems…having that creates a lot of agility in adding new product
lines and finding better ways to do things.” Similarly, one of the facets of competitive
agility at Cisco is the speed with which the firm integrates new acquisitions. In each
case, Cisco was able to rapidly integrate the new business and efficiently add the
capacity to handle the administrative processes of the acquired business. To quote Pete
Solvik, CISCO’s CIO, “without our IP and open systems based IT architecture we would
never be able to accomplish such changes [to our systems] in such a short time.”
Process capital refers to seamless IT-enabled global processes across the enterprise
and includes both business and IT work processes. Firms are utilizing IT to implement
enterprise-wide processes that squeeze out cost and cycle time inefficiencies, permit fast
response in the development of new products and services, and heighten sensitivity to
12
the voice of the customer in the strategic initiatives of the firm. We conceptualize two
dimensions of process capital: reach and flexibility. Reach refers to the geographical
scope of the IT-enabled processes.
High reach implies the existence of seamless
processes around the globe and the ability of the firm to rapidly move information as
well as physical goods across the enterprise. Flexibility refers to the adaptive character
of the processes; flexible processes allow the firm to re-architect their business processes
in response to changes in their business environments. Flexible processes also enable
firms to quickly engineer interpenetrating business relationships and alliances with new
business partners. Taken together, reach and flexibility describe the process capital of a
firm. We anticipate that higher levels of process capital enable greater competitive
agility. Processes with greater reach and flexibility position the firm to be more sensitive
to the windows of opportunities in its markets and to respond rapidly with innovative
products and services.
As an example of the role of process capital in facilitating competitive agility, the
founders of internet start-up Garden.Com sensed an opportunity in an industry with
thousands of local growers all around the country and no way to get their products
efficiently and effectively out to a national audience. The company was founded on the
idea of electronically tying the inventories of these farms and growing fields. In order to
have this virtual supply chain work, Garden.com built from scratch a software system
that routes orders to appropriate suppliers and tracks what products those suppliers
have on hand and how much they cost. The system also plans for future inventory.
Now Garden.com and its customers use the system to find out the status of an order
anytime, day or night. This IT-enabled process capital allows Garden.com to quickly
alter its product mix to meet changing demand patterns. Similarly, Davenport (2000)
13
cites the example of EarthGrain as a firm that enhanced its competitive agility through
enterprise systems integration. The firm found that it has no integration between its
order-to-cash, picking, delivery and accounts receivable processes. Further, there was
no visibility into its finished goods inventory and managers learned of manufacturing
shortages only when the line ran out. On the sales side, management had limited
visibility about its least and most profitable customers. With the implementation of
SAP’s R/3, the firm gained unprecedented visibility into its operations and its customer
base and more tuned to its business environment.
Knowledge capital refers to the IT-enabled integration of knowledge across the
enterprise. Knowledge capital refers to both the objectified repository of organizational
knowledge as well as the systems of knowing in the organization (Nahapiet and
Ghoshal, 1998; Spender, 1996). Objectified knowledge includes all forms of knowledge,
such as tacit and explicit, know-how, know-what, and know-why, and IT and business
knowledge.
Systems of knowing include the complex social interactions among
knowledgeable individuals that facilitate the rich exchange of previously held
knowledge and generation of new knowledge.
IT facilitates knowledge capital by
providing repositories for the storage and use of objectified knowledge and by enabling
effective systems of knowing (Alavi, 1997). We identify two dimensions of knowledge
capital to reflect its value as an IT-intensive option for facilitating competitive agility.
First, variety refers to the breadth of the different knowledge elements available within
the knowledge capital. Higher variety refers to the richness of the knowledge base and
the availability of different types of knowledge. Second, mobility refers to the ability to
redeploy existing knowledge across the enterprise and leverage economies of expertise.
Brown and Sambamurthy (1999) describe the case of a global firm that initiated a thrust
14
toward leveraging its existing knowledge across a variety of global markets by building
architectures that facilitated the mobility and application of knowledge in a variety of
business contexts. Taken together, we propose that variety and mobility describe the
value of knowledge capital in facilitating competitive agility.
Knowledge capital is an important option because it positions firms to quickly draw
upon its prior learning in sensing market imperfections, discovering arbitrage
opportunities, and shaping strategic innovation moves. IT facilitates the development
and leverage of knowledge capital by providing support for a variety of strong and
loose ties among managers (Constant, Sproull, and Kiesler, 1996).
For example,
electronic forums such as chat rooms and “digital water-coolers” enable the
geographically dispersed members of an organization to share information and
exchange professional knowledge. Similarly, advanced communication technologies
enable rich communication among managers in organizations and facilitate the longterm emergence of shared structures of interactions, cognitions, and trust (Huber, 1991).
Alavi and Leidner (1999) describe three common applications of IT to organizational
knowledge management initiatives: (a) the coding and sharing of best practices, (b) the
creation of corporate knowledge directories, and (c) the creation of knowledge networks.
As an example of IT support for knowledge sharing, the authors discuss the case of an
insurance company that faced the commoditization of its market and declining profits.
The company found that the application of the best decision making expertise via a new
underwriting process supported by a knowledge management system enabled it to
move into niche markets and improve its profitability.
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Relational capital refers to the existence of strong connections between the firm and
its external business partners. The locus of value creation in contemporary business
environments has shifted from the internal value chain toward the value constellation of
relationships between a firm and its business partners (Norman and Ramirez, 1993).
Relational capital refers to the ability of the firm to generate economic rents through
webs of alliances and relationships with other business firms. It becomes a source of
superior firm performance when a firm is able to leverage its interfirm relationships in a
superior manner compared to its rivals (Dyer and Singh, 1998). The capabilities of a
variety of inter-organizational technologies and systems, including EDI, virtual private
networks, and extranets offer prospects for solidifying inter-organizational networks of
relationships and building value constellations as a platform for competitive agility.
Dell Computer Corporation offers a good case evidence of the power of IT-enabled
relational capital in facilitating competitive agility: pre-established relationships with
business partners enable Dell to implement a business model where customers can place
orders on the Internet and specific business partners collaborate in the order fulfillment.
Relational capital ensures that all the collaborating firms trust each other and their
collective commitment toward customer satisfaction; therefore, individual firms devote
their resources toward their specific competence and expertise in the order fulfillment
process (Magretta, 1998). Argyres (1999), in describing the role of information systems
in the design of the B2 stealth bomber, points to the IT system’s ability to
unambiguously define product specifications and the transparency afforded by the
system for monitoring compliance. Such capabilities provide an environment for greater
trust and collaboration among the partners.
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We conceptualize two dimensions of relational capital.
First, the breadth of
relational capital refers to the number of external business partners; greater the breadth,
the higher the prospects for access to complementary assets, resources, and capabilities.
Second, the degree of connectedness refers to the strength of the coupling with business
partners.
Coupling occurs in the form of investments in relation-specific assets,
knowledge-sharing routines, and governance mechanisms.
Relational capital is built on the capability for information sharing, along and across
interdependent supply chains. In building relational capital, firms must rethink their
current supply chains and make sure their business components can be integrated easily
across enterprises. This requires the ability to share process knowledge and engage and
envelop their partners' processes, even if the partner is a fierce competitor in other
markets. Case in point: EMC Corp. designs, sells and services enterprise storage and
retrieval systems. While IBM Corp. is its largest and most formidable competitor in the
DASD (direct access storage device) market, EMC purchases key components such as
the disk drive assembly from IBM, and integrates with IBM in a virtual supply chain
with other PC vendors.
As partnerships are increasingly formed around external information constituencies,
various forms of IT-enabled relational capital (e.g. supply chain partnerships, customer
relationship systems, and information meta-mediaries) will emphasize the firm’s ability
to be agile. This will in turn create a new focus for IT investments, which must be
targeted towards building such networked relationships.
In the Internet economy,
nimble companies see such partnerships as the only sure way to quickly scale up their
web sites and develop new capabilities.
Case in point: Intelligent Digital creates
business-to-business trading applications for vertical markets.
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It recently formed a
partnership with four ebusinesses to add more capabilities to its online trading system.
Under the deal, Moai Technologies provides transaction and auction engines; CardoNet
configures a company's catalog and product information for a searchable database;
Yantra, an order processing and fulfillment company, allows buyers and sellers to track
the status of their orders via the Internet; and, eCredit.com expedites the online credit
application process for businesses that need financing. Such partnerships built around a
technology platform allow the seamless provision of services to customers, even though
the service components are owned and managed by different alliance partners.
Taken together, the breadth and degree of connectedness between partners suggests
that IT-enabled relational capital can serve as an important determinant of competitive
agility. Greater relational capital enables a firm to leverage its interfirm relationships in
being alert to windows of opportunity in the marketplace and leveraging its partners’
assets, competencies, and expertise in quickly exploiting those opportunities
(Venkatraman and Henderson, 1998).
Digital capital refers to the ability of the firm to deconstruct its traditional value
chains and disentangle information from the physical activities within the value chain.
Advanced information technologies enable firms to create digital assets around
customer, product, channel, and process information.
Further, as information gets
disentangled from the traditional physical value chain activities, firms are able to bundle
the digital assets in novel ways to create new business models (Evans and Wurster,
2000). The success of firms such as Amazon, E*Trade, Charles Schwab, and Dell suggest
that digital capital will increasingly underlie the ability to devise new products, services,
distribution channels, and business models. Consistent with Evans and Wurster (2000),
we identify two dimensions of digital capital. First, richness refers to the quality of
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information and includes aspects such as interactivity, customization, currency, and
relevance embedded in the digital asset. For example, customers of Dell can now easily
track the status of their order on the Internet all the way through to final delivery; such
transparency is made feasible by the digitization of the relevant information and the
mechanisms for easy delivery of the information to the external customers. Second,
reach refers to the number of people who participate in the sharing of the information.
With greater reach, firms can involve more customers and more intimately within their
value stream activities and tap their expertise in enhancing the effectiveness of those
activities (Venkatraman and Henderson, 1998). As Evans and Wurster (2000) argue, the
extent to which information is embedded in physical value chains governs the trade-off
between richness and reach. However, as firms begin to unbundle such embedded
information from its physical carrier and create new bundles of digital capital, both
reach and richness can be simultaneously enhanced. Often, the information about
transactions is more valuable than the transaction themselves. The value embedded in
such information assets constitutes the company’s digital capital. For example, Dun and
Bradstreet Corp. and Equifax Inc. make billions of dollars selling information about
business and customer transactions.
Cybercompanies such as DoubleClick and
LinkExchange enable web advertisers and product purveyors to capture information
about who is visiting their sites, for how long and what they're perusing. This
information enables firms to develop deep customer relationships and thereby provides
them with more customized products and service, further cementing the relationships.
Taken together, we propose that higher digital capital enhances the competitive agility
of the firm.
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Facilitating Competitive Agility Through IT-based Options
How do the five IT-based options described in the previous section facilitate the
development of competitive agility?
Figure 1 depicts our theoretical model for
answering this question. The model is again rooted in the formulations of the strategic
options theory.
From this theoretical perspective, strategic options arise from the
interplay of firm’s existing investments, its knowledge and capacities, and its
environmental opportunities.
Further, two core processes describe how options
facilitate competitive agility.
The first process, options building, suggests that
resources, knowledge and insight are needed for firms to place their “bets” on specific
IT-based options. The options building process describes how firms recognize the value
of building options commit the initial resources for building and maintaining these
options. The second process, options striking, describes how firms recognize strategic
opportunities in a hypercompetitive environment and activate their IT-based options to
seize those opportunities with speed.
As portrayed in Figure 1, the level of IT
investments, IT management capability, and organizational leveraging mechanisms play
an influential role in the options building process and the striking of those options in
building competitive agility.
The following sections present our theoretical model
through the dynamic processes of options building and options striking.
The Options-building Process
While the options-bundle itself can be viewed as a “stock”, it is accumulated over
time in a path-dependent way. Bowman and Hurry (1993) characterize the optionsbuilding process as a two-step process involving the recognition of shadow options (the
phase when managers identify the opportunities) and the options building phase (when
the needed skills to exploit the opportunity are developed). As exhibited by our model,
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three factors explain the process by which firms build the IT-options bundle. These
factors are the level of IT investments, IT management capability, and organizational
leveraging mechanisms.
The level of IT investment is a multidimensional construct and reflects investments
in both IT assets and technical expertise (different skillsets). IT assets describe not just
hardware and telecommunications, but also investments in process (e.g., ERP),
knowledge (e.g., Intranet, data mining), social (e.g., e-mail and collaborative work), and
relational technologies (e.g., EDI, VPN).
Advanced information technologies,
particularly those required for building IT infrastructure, process, knowledge, relational,
and digital capital require significant capital outlays. At the same time, the technical
skills required for installing them and configuring organizational processes, knowledge,
and relationships through these technologies are scarce and expensive.
Therefore,
significant levels of IT investments are a prerequisite to the building of IT-based options.
However, significant IT investments alone are not enough; firms must also posses
the technical and managerial expertise to identify the appropriate technologies and
develop principles for their effective implementation and assimilation into the firm. IT
management capability describes the ability of the firm to assemble the necessary
technical knowledge (e.g., architectural planning), work processes (e.g., solutions
integration, systems development and installation), and sourcing arrangements (e.g.,
outsourcing, third-party contracting, hiring consultants) to build the needed IT
infrastructure.
The growing complexity of information technologies as well as the
dramatic pace of technical innovation implies that IT management capability is required
to channel the IT investments appropriately and facilitate the building of IT-based
options.
Prior empirical evidence supports the significant role of IT management
21
capability in the organizational assimilation of IT into the ongoing organizational milieu
of structures, processes, skills, and relationships (Boynton, Zmud, and Jacobs, 1996).
Finally, the effectiveness with which IT investments and IT management capability
can be channeled toward building IT-based options is also related to the strategic
foresight and insight of the firm (Kettinger and Grover, 1995). Senior management of
the firm must possess the strategic foresight, systemic insight, and managerial
commitment to undertake the needed IT investments and provide the necessary
political support for undertaking risky and complex projects.
We define strategic
foresight as the ability to anticipate promising information technologies and the timing
of investments in these technologies. Systemic insight refers to the ability to visualize
investments in multiple information technologies and complementary investments in
skills and relationships to build the IT-intensive options.
Finally, managerial
commitment refers to the organizational willingness to build the IT-based options. Weill
(1993) argued that top management support and championing is crucial for directing IT
investments appropriately.
Sambamurthy and Zmud (1996) provided empirical
evidence that top management’s (including the senior IT and business executives)
insight into the strategic importance of IT is critical in the funding of risky IT projects,
particularly when their business value is not readily apparent.
Collectively, our theoretical arguments suggest that the levels of IT investment, IT
management capability, and the organizational foresight, insight, and commitment
influence the effectiveness of the options-building process.
The simultaneous or
interactive effect of these three factors is related to strength of the IT-based options
bundle. Therefore, we propose that:
22
Proposition 1
The strength of the IT-based options bundle will be significantly
related to the levels of IT investment, IT management capability,
and organizational foresight, insight, and commitment.
The Options-striking Process
Applying the lens of the options theory, we propose that the options-striking process
facilitates competitive agility. As defined earlier, competitive agility is the capability to
be ready to recognize opportunities for fleeting competitive advantage in an imperfect
market and execute competitive moves to seize those opportunities. During options
striking, firms recognize the opportunities for competitive arbitrage, activate their ITbased options, and combine the options in creative ways to shape competitive moves
with speed and surprise.
IT-based options facilitate competitive agility in three ways: first, they enhance the
organizational ability to scan their customer segments, existing product-market spaces,
competitive maps, and macro-economic environments for signs of arbitrage
opportunities. For example, IT-based options enable higher levels of awareness about
customer preferences, as demonstrated by the success of firms such as Amazon and Dell.
Magretta’s (1998) interview with Michael Dell provides many glimpses of the ways in
which the firm’s IT-intensive options bundle enable it to respond with flexible product,
price, and solution offerings to its customers.
However, IT-based options, by themselves, are not enough to facilitate competitive
agility. Strategic foresight, systemic insight, and managerial commitment are valued
organizational capabilities that act as leveraging mechanisms in activating the IT-based
options and striking them in different combinations to execute agile competitive moves.
We define strategic foresight as not just technical foresight, but also the ability to
anticipate discontinuities in the business environment, threats and opportunities in the
23
extended enterprise, including customer relationships, and impending disruptive moves
by competitors. Systemic insight is the ability to visualize the connections between the
different forms of IT-based options and emerging market opportunities to architect
creative competitive moves.
Finally, managerial commitment is the willingness to
activate the options, commit additional resources to either strengthen the options or
acquire complementary technologies, and implement organizational changes necessary
to execute the improvised competitive moves. Therefore, strategic foresight, systemic
insight, and managerial commitment leverage the IT-options bundle in building
competitive agility. We propose that:
Proposition 2
The competitive agility of firms will be significantly related to the
strength of the IT-based options bundle and the strategic
foresight, systemic insight, and managerial commitment of the
firm.
Although we identify options building and options striking as two distinct processes
that are temporally sequenced, contemporary businesses that operate at Internet speeds
find that the windows of opportunity are forever shrinking. Therefore, the temporal
distance between the two processes of options building and options striking should vary
in different competitive contexts. There are many competitive episodes where the two
processes could occur in much more closely coupled manner.
Often, strategic
partnership deals, which range from handshakes to contracts and are one of the facets of
competitive agility, are often inked in a few days, not months. For example, in May 1999
when Hewlett-Packard, Qwest Communications, and SAP decided to form an
application service provider alliance they consummated the deal in just 60 days. With
nimble online firms moving even more quickly, it may well be the case that options
24
building and options striking processes appear to take place almost simultaneously in
these instances.
The Regenerative Process
While the preceding sections have described the influence of IT-based options and
organizational leveraging mechanisms on competitive agility, we recognize the
feasibility of a reverse feedback loop that we term as the regenerative process. The
regenerative process describes the influence of competitive agility on the strength of the
IT-based options and the strategic foresight, systemic insight, and managerial
commitment of the firm. Agile competitive moves occur through an improvisational
process of learning, action, and reflection. As firms make a few agile moves, they learn
through their actions to understand the bases of both successful and failed competitive
moves. These reflections of action result in greater insight into the dynamics of the
business environments, relationships between the IT-based options, tactics for quicker
and more effective striking of the options, and a commitment to make additional
investments. As a result, we recognize that greater levels of agility would strengthen the
IT-based options and the organizational leveragability mechanisms. However, we do
not offer a formal proposition for this linkage since the focus of our theorizing is on the
role of IT options in facilitating competitive agility.
CONCLUSION
How should firms reposition and reconceptualize the role of IT management in
contemporary business firms that operate in a hypercompetitive environment
characterized by the pervasiveness of information in all aspects of competitive activity.
Our paper draws upon the theories of Schumpeterian economics and the strategic
25
options theory to advance the argument that IT should evolve into the role of a strategic
options generator. As an options generator, we described the value of IT as linked with
the development of strong IT-based options in the form of IT infrastructure, process,
knowledge, relational, and digital capital. Our theoretical model examines the manner
in which options are built and activated within the strategic milieu of organizations to
enhance competitive agility.
Our theoretical model not only extends the existing literature but also provides fresh
perspectives for IT management practice. Academic researchers have directed their
attention toward the linkage between IT and firm performance by demonstrating the
positive relationship with IT investments (Hitt and Brynjolfsson, 1996; Bharadwaj et al.,
1999) and IT capabilities (Bharadwaj, forthcoming; Bharadwaj et al., 2000). Further, the
existing literature has also argued that IT investments coupled with complementary
investments in organizational capabilities enhance organizational performance. Yet,
there is room for a clear and theory-based explanation of the linkage between IT
investments, organizational capabilities, and firm performance. Our theorizing focuses
on a significant antecedent of superior business performance in the hypercompetitive
business environments, viz., competitive agility. We theoretically demonstrate how ITbased options and organizational leveraging mechanisms (i.e., capabilities) act through a
combination of mediating and moderating influences to link IT investments with firm
performance. Our theoretical model and propositions should open up fresh avenues for
a richer examination of the IT linkages with business performance.
On a practical note, our conceptualizing provides guidelines for mangers regarding
how they should position the role and value of IT in their firms. Despite the strategic
importance of IT to long-term growth, survival, and renewal, CIOs and senior IT
26
executives are challenged to explain the strategic relevance of IT and to justify their IT
budgets with “rules of evidence” (such as ROI measures) that pay scant attention to
longer term considerations.
At the same time, with the rising tide of competitive
disruption from savvy startups, senior management in most firms grapples with the
effective ways of aligning their IT investments with their firms’ strategic priorities and
ensuring that their firms are poised to take advantage of the advanced functionalities of
information technologies.
The strategic options framework legitimizes the CIO’s
concern with longer-term potential and future flexibility and focuses attention on the
perils of not developing positions in IT-based options. Our proposed framework based
on strategic options perspective provides a starting point to develop a theory of IT’s true
contribution, especially in enabling the future flexibility and competitive agility of firms.
The options perspective could facilitate discussions between senior IT and business
executives about moving beyond quantitative approaches to the justification of IT
investments and adopting a more long-term perspective on the valuation of IT
investments. Further, our theoretical model more clearly positions IT investments in the
strategic and organizational milieu to advocate that competitive agility results from the
collaborative and collective actions of IS and business executives in contemporary firms.
We hope that our proposal for the role of IT as a strategic options generator will
stimulate both researchers and practitioners to benefit from fresh thinking about the
strategic management of IT.
27
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32
TABLE 1
IT as Strategic Options Generator: Contributing Theories
Theoretical Perspective
Core Formulations
Linkage with the Options Perspective
Comprehensiveness of
strategic planning
(Frederickson, 1984;
Mintzberg, 1973; Quinn,
1980)
Comprehensiveness refers to the extent to which the
strategy planning process relies upon formal, synoptic
approaches vs. the use of iterative, trial-and-error,
processes of learning and adjustment.
Absorptive capacity and
strategic learning (Cohen
and Levinthal, 1990)
Learning in uncertain environments is a function of
prior-related knowledge.
Resource based theory of the
firm (Penrose, 1958; Teece
and Pisano, 1994)
Superior firm performance is related to the possession
of valuable, rare, and inimitable resources. Superior
performance also requires integrating mechanisms that
allow the blending of different combinations of
resources to create positions of relative advantage
compared to rivals.
IT management generates strategic value by aligning
the core IT processes, knowledge, and organizing
approaches with the core processes, knowledge, and
organizing approaches of the firm.
Competitive agility requires improvisation
in response to emerging marketplace
opportunities and challenges. Options
facilitate ability to improvise by providing
requisite resources and “flexible scripts of
action” to help managers improvise with
speed and surprise.
The possession of strategic options enables
firms to more quickly learn about
promising opportunities and respond
faster than rival firms.
Options
represent
superior
firm
endowments when they blend IT with key
firm resources. Further, the ability to
recognize opportunities for building and
striking options allows speed, surprise,
and disruption.
Options
are
the
organizational
infrastructure for facilitating competitive
agility.
They blend IT with key
organizational capabilities, such as
processes, knowledge, and relationships.
IT strategic alignment
(Henderson and
Venkatraman, 1992)
TABLE 2
The IT-options Bundle
IT-enabled Capital Forms
Infrastructure Capital
Process Capital
Knowledge Capital
Relational Capital
Digital Capital
Definition
The assembly of IT products and services into an integrated platform
that not only provides economies in the cost of ownership, but also
ensures appropriate scalability to the future business opportunities
for growth and flexibility.
The seamless IT-enabled global processes across the enterprise that
includes both business and IT work processes.
The IT-enabled integration of knowledge across the enterprise. It
includes the objectified repositories of organizational knowledge such
as knowledge bases as well as the knowledge networks that enable
knowledge sharing.
The IT-enabled web of partnerships that provide the capability for
sharing of information, knowledge, and processes along and across
interdependent supply chains.
The assets formed by the digitization of customer, product, channel,
and process information that allows their leverage independent of the
physical forms in which they have been traditionally embedded.
34
Dimensions of the Capital
Scalability
Flexibility
Reliability
Reach
Flexibility
Variety
Mobility
Breadth
Degree of connectedness
Reach
Richness