MIS 9003 – Prof. Min-Seok Pang

Week 2 Reading Summary (HK)

Ray, G., Wu, D., & Konana, P. (2009). Competitive environment and the relationship between IT and vertical integration. Information Systems Research20(4), 585-603.

Information technology (IT) can reduce coordination costs for companies, both internally and externally, minimizing barriers preventing the use of markets. Based on this premise, it is proposed that increasing the use of IT will in turn decrease the employment of vertical integration (VI). Past research has found that less vertically integrated firms have a higher need for external coordination and thus a higher demand for IT capital (Dewan et al., 1998; Hitt, 1999). Despite this premise and its empirical support, the average level of VI has increased over the past 25 years. This prompted Ray, Wu, and Konana (2009) to examine firms included in InformationWeek 500 from 1995 to 1997 using COMPUSTAT data to better understand this incongruence. Ray et al. (2009) considered demand uncertainty and industry concentration as boundary conditions which impact VI and IT spend. Demand uncertainty captures the degree of unpredictability in consumers’ tastes and preferences as well as in production and service technologies. Industry concentration is high when a leader or leaders control an industry with high barriers to entry; diluted industries are those with many small firms.

Results found that when demand uncertainty is high or industry concentration is low, results were consistent with past literature; IT is associated with a decrease in VI. In these conditions, an increase in the level of VI is associated with an increase in product and coordination costs and thus, less VI is ideal. On the other hand, when demand uncertainty is low or industries are highly concentrated, IT is associated with an increase in VI; this is contrary to past literature. In these environments, VI is associated with a decrease in production and coordination costs and thus, is ideal. Effectively, these findings indicate that the industry environment impacts the value of VI and IT.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.