Relationship Of Performance Measures Vs Investment Measures example essay topic

I INTRODUCTION - This paper contains three parts. The paper contains an introduction to a nine article literature review, a body containing a 2-page outline for each article (including the research problem / question, theory being researched, methodology used including research design, variable operationalization, hypotheses, and data analysis, findings, implications and future research direction) and a Summary and Conclusion to the entire set of literature as part of this work. The nine article review is required course work for CSA 6080, - Professional Studies Workshop (Information Technology Management). The instructions have been provided have been include for reference in Appendix A. CSA 6080 Syllabus on page #25.

The topic of interest is a desire to contrast the current cost world vs. the world of considering constraints management. The two worlds can be applied to any systems thinking (Goldratt and Cox 1992) scenario and is directly applicable to information systems and information technology (IS / IT) management theory. The current process of instituting IT / IS into organizations makes the topic of extreme importance as the cost world struggles with the issues of local optimal and IT / IS performance. Nine articles were chosen to investigate the current literature on the basis of IT / IS investments and the organizational performance or 'bang for the buck' return on those investments. The articles are summarized below for initial exposure: ARTICLE Bharadwaj, A.S. (2000). "A resource-based perspective on information technology capability and firm performance: An empirical investigation".

MIS Quarterly 24 (1): 169-196. Gooijer, J. d. (2000). "Designing a knowledge management performance framework".

Journal of Knowledge Management 4 (4): 303-310. Hu, Q. and R. Plant (2001). "An empirical study of the casual relationship between IT investment and firm performance". Information Resources Management Journal 14 (3): 15-26. Kumar, A., W.M.P. Van Der Aalst, et al. (2001/2002).

"Dynamic work distribution in workflow management systems: How to balance quality and performance". Journal of Management Information Systems 18 (3): 157-193. Mahmood, M.A. and G.J. Mann (2000). "Special issue: Impacts of information technology investment on organizational performance".

Journal of Management Information Systems 16 (4): 3-12. Rigby, C., M. Day, et al. (2000). "Agile supply: rethinking systems thinking, systems practice". Journal of Agile Management Systems 2 (3): 178-186. Sambamurthy, V. and R.W. Zmud (1999).

"Arrangements for information technology governance: A theory of multiple contingencies". MIS Quarterly 23 (2): 261-290. Sircar, S., J.L. Turnbow, et al. (2000). "A framework for assessing the relationship between information technology investments and firm performance". Journal of Management Information Systems 16 (4): 69-97.

Thatcher, M.E. and J.R. Oliver (2001). "The impact of technology investments on a firm's production efficiency, product quality, and productivity". Journal of Management Information Systems 18 (2): 17-45. Table 1 Summary of Literature Review Articles II REVIEW OF THE LITERATURE - 1.0 Article Number One: The initial article in this literature review was titled, A resource-based perspective on information technology capability and firm performance: An empirical investigation.

The article was published in the MIS Quarterly by Anand hi S Bharadwaj. The research problem or question addressed by this article is that there is a a widely held belief that development if an IS / IT infrastructure is mandatory for future business performance. Does high levels of Information Technology (IT) ability correlate to high business performance measures? The theory being researched is the Theory of "productivity paradox", and the controversy over the business value of computer investments continues to rage even in the face of more encouraging evidence about payoffs from IT (Brynjolfsson 1993; Brynjolfsson and Hitt 1993, 1996; Hitt and Brynjolfsson 1996). The methodology in the research design in this article investigated the "matched sample comparison group methodology" to assess the strength of relationally between utilizing IT capability and a firms performance. This is a popular methodology that has been used in several research studies in the accounting, finance; and marketing literatures (c. f.

Balakrishnan et al. 1996). The article utilizes a research design that is quantitative and longitudinal in nature. The data was collected from practitioner journals and was scaled to level the playing field for attributes such as industry, size and cross sectional variations. The variable operationalization utilized dependent variables that were derived from Compustat. The testing for financial performance involved the identification and use of five measures or ratios.

Two were measures of how profitable a company is and are, return on assets (ROA) and return on sales (ROS), have been widely used in the IT business value literature as measures of firm profitability (Cron and Sobol 1983; Hitt and Brynjolfsson 1996; Strassman 1990; Weill 1992). The ROA measure, calculated as the ratio of net income to assets, indicates how profitably a firm employs its assets since it reflects how much profit a firm is able to generate for each dollar of asset invested. It is a broad measure that is correlated with several other profitability measures (Grinder and Nor burn 1975). The article also identified the ROS measure as a ratio of net income to sales generated. There were additional ratios that are related to the cost side, cost of goods sold to sales (COGS / S) and selling and general administrative expenses to sales (SG&AIS).

Bharadwaj's hypothesis are two fold and are stated below: H 1: Superior IT capability will be associated with significantly higher profit ratios H 2: Superior IT capability will be associated with significantly lower cost ratios. The fundamental article acquired samples then matched-sample to a comparison group methodology. The next step was to utilize ratings (available publicly) and used to compare a candidates IT abilities versus the companies performance levels. The data analysis was the comparison of the mean levels utilizing a t-test was the method of choice but was discarded due to non-parameter ics.

The Kolmogorov-Smirnov test was utilized to reject the hypothesis that the dependent variables (profit and cost performance ratios) exhibit a gaussian distribution. Wilcoxon Rank Sum Test was used to test the difference levels in the data evaluated (Conover 1980). 2.0 Article Number Two: The second article in this literature review was titled, Designing a knowledge management performance framework... The article was published in the Journal of Knowledge Management by Gooijer, J. d. (2000).

The fundamental research question or problem attempting to be answered was not evident. Even though the second article is a peer reviewed journal and is a complete full text version it is a practitioners view of Knowledge Management (KM) and its effect on the business performance model utilized for management of public sector organizations. A second interest arena is the degree to which people utilize KM in their work. Theory being researched was one of noncommittal to a theory.

Instead the author investigated the possibility of developing a KM business performance model or roadmap. In the end three approaches were presented but not given any detail. The article utilized a case study type methodology. This article was a D journal article and discussed model creation but did not address research design, variable operationalization, hypothesis or methodology / data analysis.

Discussion followed the IT substructures and infrastructure to facilitate the flow of the KM process. The article is a case study based in Australia and desires to formulate a business performance model that can be applied to the public sector. Existing models were alluded to that were stated to be in the current literature but were not identified or discussed. There were two frame works that were merged to generate the model proposed for study, the KM performance scorecard and the KM behavior model.

KM levels of performance were identified and stratified. The levels were awareness and then understanding followed by the use of KM tools, information and then the derived knowledge. These latter two created a strata that is followed by a KM jump to the next quantum level, behavior change. The final quantum leap is to the last level of organizational performance improvement. 3.0 Article Number Three: The third article in this literature review was titled, An empirical study of the casual relationship between IT investment and firm performance. The article was published in the Information Resources Management Journal by Hu, Q. and R. Plant (2001).

Increasing IT investment and the measure of return on investment is the research question investigated by this article. The major contention of the article is that it should not be a practice to correlate IT expense to competitive advantage but to analyze the same company longitudinally. The assertion is made that as processing capabilities have increased many fold productivity has not and the investment in IT could be applied to other investment options available. The flaw of past studies, as asserted by Hu, is that the past case studies have only considered across the industry in a cross sectional manner but should consider the same company longitudinally. There is a cross correlation between this article by Hu and the fifth article by Mahmood in the discussions of IT investment vs. bag for the buck for the organization performance measures: In the study of Mahmood and Mann (1993), the Pearson correlation and Canonical correlations were obtained between a set of six organization performance variables and a set of six IT investment variables using the Computerworld "Premier 100" companies 1 of 1989. Based mostly on the correlation, it was found that organizational performance measures, such as sales by total assets, market value to book value, and return on investment (ROI), were significantly positively correlated with IT investment measures, such as IT budget as percentage of revenue and percentage of IT budget for training employees.

However, it was also found that IT budget as a percentage of total revenue was significantly negatively correlated to performance measures such as sales by total assets, market value to book value and ROI (Mahmood and Mann 2000). An excellent point of the article that lends credence to the longitudinal aspect of this study id the insertion that when IT funds are spent then the improvement would take time. The dependent variable used in this study is IT investment with the measures of enterprise performance being the independent variables (return on investment (ROI), return on assets (ROA), market share, ect. ). Hu presents the following hypotheses: Hypothesis 1 a: The increase in IT investment per employee by a firm in the preceding years may contribute to the reduction of operating cost per employee of the firm in the subsequent year. Hypothesis 2 a: The increase in IT investment per employee by a firm in the preceding years may contribute to the increase of productivity of the firm in the subsequent year.

Hypothesis 3 a: The increase in IT investment per employee by a firm in the preceding years may contribute to the sales growth of the firm in the subsequent year. Hypothesis 4 a: The increase in IT investment per employee by a firm in the preceding years may contribute to improvement of profitability of the firm in the subsequent year, (Hu and Plant 2001). With the following hypotheses presented when considering a company that exhibits consecutive years of profitable growth: Hypothesis 1 b: The reduction of operating cost per employee by a firm in the preceding years may contribute to the increase in IT investment per employee of the firm in the subsequent year. Hypothesis 2 b: The increase of productivity of a firm in the preceding years may contribute to the increase in IT investment per employee by the firm in the subsequent year. Hypothesis 3 b: The sales growth of a firm in the preceding years may contribute to the increase in IT investment per employee by the firm in the subsequent year. Hypothesis 4 b: The improvement of profitability of a firm in the preceding years may contribute to the increase in IT investment per employee by a firm in the subsequent year, (Hu and Plant 2001).

The findings of Hu indicate that the cause and effect of IT investments by a company in prior years contributes little to the four figures of merit identified by this study (operating cost, productivity, sales growth, and profitability, Hu and Plant 2001). There was an exception identified as ROA did increase but the relationship is not significant. Data utilized was from two databases and are in the public domain, ComputerWorld (CW) and the Information Week (IW) databases. Future areas of study are the normalization due to over spending of IT and verifying additional profitability measures (Goldratt and Cox 1992). 4.0 Article Number Four: The fourth article in this literature review was titled, Dynamic work distribution in workflow management systems: How to balance quality and performance. The article was published in the Journal of Management Information Systems by Kumar, A., Van Der Aalst, W.M.P. et al.

(2001/2002). This can be considered a duel research question but the intent of the article is to formulate a model not investigate adding research to a research question. Further elaboration on this article would be a waste of space and time. 5.0 Article Number Five: The fifth article in this literature review was titled, Special issue: Impacts of information technology investment on organizational performance published in the Journal of Management Information Systems by Mahmood, M.A. and G.J. Mann (2000). Article number five turns out to be a 'Special Issue' and is a mini literature review on the subject of IT expenditures, organization performance and productivity. The articles reviewed are by Sherry D. Ryan and David A. Harrison, Sarv Devaraj and Rajiv Kohli, Byung tae Lee and Nir up M. Menon, Michael J. Davern and Robert J. Kauffman, Paul P. Tallon, Kenneth L. Kraemer, and Vijay Gurbaxani, Arik Ragowsky, Myles Stern, and Dennis A. Adams, Akemi Take oka Chatfield and Philip W Yetton and Yolanda E. Chan.

Ryan and Harrison conducted information gathering from IT and compared against typically included and eliminated costs. Devaraj and Kohli an longitudinal investigation to also test the IT investment vs. business quality and performance. Devaraj and Kohli introduced the concept of business process reengineering (BPR) and its positive correlations to quality and profitability. Lee and Menon added to the work of Devaraj and Kohli by utilizing additional longitudinal studies utilizing both nonparametric and parametric evaluations.

Davern and Kauffman presented a modification to company worth to better understand the effects of the IT investment vs. business profitability and quality. Tallon, Kraemer, and Gurbaxani applied survey data to a process oriented model approach to evaluate not only the elements of BPI but also the value chain. Ragowsky, Stern, and Adams attempted to correlate the characteristics of a business to IS and then followed up with a comparison of companies IS applications (latter exhibited no correlation while the former showed correlation). Chatfield and Yetton focused on interdepartmental effects and IT investment in the form of EDI (Electronic Data Interchange).

Lastly Chan utilized performance measures that are quantitative. The research problem was well stated and many examples given in this literature review summary. Many relevant theories were identified with the applicable methodologies lightly referred to. Relevant research design, variable operationalization, hypotheses, data analysis as well as findings, implications and areas of future research were overlooked but can be found by following the reference cited trail. 6.0 Article Number Six: The sixth article in this literature review was titled, Agile supply: rethinking systems thinking, systems practice published in the Journal of Agile Management Systems by Rigby, C., M. Day, et al. (2000).

The article is a theoretical paper espousing the merits of systems thinking but with a twist that incorporates transformation modeling. The four principles of agility are addressed (adding value proposition, increased competitiveness though cooperation, virtual cooperation and agile webs). The article identified the base theory as general systems theory which is based on network theory and inter-organizational theory. The article followed the past history of systems theory. The history lead to the formulation of extensions past the brick and mortar walls to interactions between the supply chain and outside companies.

The systems approach can lead to internal organizational redesign efforts. The general systems theory was refined in the article to the IMP (Industrial Marketing and Purchasing) model. The variables identified were actors (in the interactions), elements of the environment, environment, power, dependency, conflict and co-operation. Outcomes were the need for mutual trust for relationship stability and social exchange to alleviate short-term problems. Being a theoretical article the analysis methodologies, Relevant research design, variable operationalization (with the exception of those previously stated), hypotheses, data analysis as well as findings, implications and areas of future research were alluded to but not specifically addressed. 7.0 Article Number Seven: The seventh article in this literature review was titled, Arrangements for information technology governance: A theory of multiple contingencies published in the MIS Quarterly by Sambamurthy, V. and R.W. Zmud (1999).

The main theme of this article is the use of the term governance (control or oversight). The article identified three activity modes, decentralized governance mode, divisional IS and line management assume authority for all IT Activities (Sambamurthy and Zmud 1999). Initial literature review of IT governance was portrayed. The literature identifies three major forces throughout; corporate governance, economies of scope and absorptive capacity and are evident in today's manufacturing environments. The theoretical model utilized was the Theory of Multiple Constraints (Grekov 1989).

The TMC was utilized to formulate the following hypotheses: Hypothesis 1: Organizations facing reinforcing contingencies regarding corporate governance, scope, and absorptive capacity forces are likely to exhibit a centralized or decentralized mode of IT governance. Hypothesis 2: Organizations facing conflicting contingencies regarding corporate governance, scope, and absorptive capacity forces are likely to exhibit a federal mode of IT governance. Hypothesis 3: Organizations facing dominating contingencies regarding corporate governance, scope, and absorptive capacity forces are likely to exhibit centralized or decentralized modes of IT governance. The acquired data utilized to substantiate or refute the hypothesis came from a research project. The data was amalgamated from eight cases. A field survey was instrumented and was used to gather data and in order to assess the reliability of the coding scheme for locus, two raters (blind to this study's objectives) independently developed codes for each of the seven types of ITM decisions.

Inter-rater reliability was assessed using the Cohen's Kappa (Sambamurthy and Zmud 1999). The articles conceptualization scheme was based on the three modes previously identified (centralization, decentralization, and federal modes of governance). The conclusions to be drawn from the article identify that with the combination of the TMC and the three contingency requires new more robust theories are forthcoming. 8.0 Article Number Eight: The eighth article in this literature review was titled, A framework for assessing the relationship between information technology investments and firm performance published in the Journal of Management Information Systems by Sircar, S., J.L. Turnbow, et al. (2000). Of all the body of literature identified and presented in this literature review Sircar and Turnbow were the most comprehensive.

The fundamental issues of how to correlate firm performance with both the corporations and the corresponding IT investments to better understand the elemental bang for the buck. The literature coins the phrase mentioned by others in this literature review of a 'Productivity Paradox' (Sircar, Turnbow et al. 2000). The current debate over productivity and performance was elegantly addressed and discussed.

As defined in the article; "Productivity is measured by the efficiency with which outputs are produced for a given level of inputs and, unless otherwise mentioned, is considered synonymous with labor productivity, that is, output per unit of labor (person-hour). Measurements are made of a nation's output or a firm's output, usually the volume or value of goods and services produced. These values are then divided by the number of person-hours required. This has been the domain of economists, at both the national (macroeconomic) and firm (microeconomic) levels".

(Sircar, Turnbow et al. 2000). "On the other hand, firm performance has been measured in a variety of ways, including familial measures such as return on assets or investment, market share, and sales growth, among many others". (Sircar, Turnbow et al. 2000). The emphasis of Sircar, et al article is on the latter, a firms performance.

The article presents three (paraphrased) research questions; can the relationship of performance measures vs. investment measures be quantified (instead of individual variables)? , can IT investments correlate to a firm's measures of performance (Sales, Assets, Equity, Income, ect. ), is there a industry sector effect? and finally what are the effects of non computer capital versus computer capital on performance? Sircar, Turnbow et al. 2000). The article identified seven dependent variables and utilized data from International Data Corporation (IDC) survey data and compared to Compustat and Moody's data. Data analysis utilized a statistical software analysis package called NCS S and the normalization process was discussed adequately. Following the normalization the Spearman-Rank algorithm was used on the correlation matrix followed by the canonical analysis.

9.0 Article Number Nine: The ninth and final article in this literature review was titled, The impact of technology investments on a firm's production efficiency, product quality, and productivity published in the Journal of Management Information Systems by Thatcher, M.E. and J.R. Oliver (2001). Continued emphasis is on comparing the systems inputs to the outputs and not on throughput constraints. Thatcher and Oliver pointed out in their literature review that that there have been period where productivity has fallen while massive amounts of capital has been inserted in IT infrastructure. Issues addressed were economy vs. industry level studies and activity based measures of performance Proposition 1: IT investments reducing the costs of overhead will increase firm profits Proposition 2: IT investments reducing the costs of product / service design and development will increase firm profits. Proposition 3: IT investments reducing the variable costs of product / service provision will increase firm profits. Proposition 4: IT investments reducing the costs of overhead will increase firm productivity.

Proposition 5: IT investments reducing the costs of product / service design and development will increase firm productivity if the firm's overhead costs are sufficiently large (relative to market size). Otherwise, such investments will decrease productivity. Proposition 6: IT investments reducing the costs of product / service provision will increase firm productivity if the firm's overhead costs are sufficiently large (relative to market size). Otherwise, such investments will decrease productivity (Thatcher and Oliver 2001).

The Methodology used was to apply a closed-form analytical model. The model utilized a scoring system analogous to what Consumer Reports would provide. Attributes included; demand, production costs, production efficiency, revenues, profits and productivity. The article provided a text book type section that addresses the productivity vs. IT investment issues but did not perform analytical analysis on collected data.

There were two concerns raised. The first is being focused on reducing production costs while improving productivity that quality suffers and the second is viewing productivity just on available revenue and cost information and not considering a value stream mapping approach (Thatcher and Oliver 2001). METHODOLOGY Not assigned / required IV ANALYSIS AND PRESENTATION OF FINDINGS Not assigned / required V SUMMARY AND CONCLUSIONS This literature review identified that the field of IT is not vastly mature such as other fields of research and there is little on the initial area of interest which is research on the productivity paradox. The review of the literature also identified the shortage of data to perform analysis on.

There appears to be supportive and contradicting findings by each of the different articles investigating multiple facets of the same fundamental issues. The question is still unresolved as to whether the bang for the buck is justified for the IT expenditures vs. the goal of making money. A pervasive theme through out the literature available to date is that credence to the longitudinal aspect of area of study is the insertion that when IT funds are spent then the improvement would take time. The variable (s) used in the literature, with respect to IT investment, are common such as measures of enterprise performance being the return on investment (ROI), return on assets (ROA), market share, ect...

Many relevant theories were identified with the applicable methodologies and areas rich in future study can be found by following the reference cited trail. One interesting conclusion was that were the need for mutual trust for relationship stability and social exchange to alleviate short-term problems. A pervasive conceptualization scheme based on the three modes (centralization, decentralization, and federal modes of governance) was revealed. The conclusions to be drawn from the literature review is that new more robust theories are forthcoming. Finally two extremely important concerns were raised. The first is being focused on reducing production costs while improving productivity that quality suffers and the second is viewing productivity just on available revenue and cost information and not considering a value stream mapping approach.

This canary approach (cheap-cheap) is evident in industry under the auspices of Lean Production.