Week 4 Reading Summary (HK)

Tafti, A., Mithas, S., Krishnan, M. S. (2013). The effect of information technology-enabled flexibility on formation and market value of alliances. Management Science, 59(1), 207-225.

By using a sample of 169 firms that spanned 50 industries, Tafti, Mithas, and Krishnan (2013) were able to investigate the effect of information technology (IT) architecture flexibility on strategic alliance formation and firm value. Three distinct dimensions of IT architecture flexibility, open communication standards, cross-functional transparency, and modularity, were considered. Open communication considers the adoption of an open standard across firms, such as Extensible Markup Language (XML), which allows more connectivity and information transferring between firms. Cross-functional transparency is defined as the skills and abilities that are widely deployable, visible, and accessible across different functions in a firm. Finally, when a firm is modular, it is able to decompose processes into atomic, fine-grained units of functionality which can then be combined easily with other modules to efficiently construct a new process. The study considered the effect of these three dimensions of IT architecture on three types of alliances, arm’s-length, collaborative, and joint-venture alliances respectively. Arm’s-length alliances most closely resemble market transactions and are better suited for the transfer of highly codified explicit knowledge across firm boundaries. Next, collaborative alliances involve the sharing of firm specific or tacit knowledge, a recombination of products/services/processes, or heavy coupling of interoganizational business processes. Finally, joint-ventures create an entirely new business entity through the allocation of partnered resources.

Various Poisson and binomial panel models were run on a dataset that was created by combining various sources including InformationWeek, Compustat, and the Bureau of Economic Analysis. Results found that open communication and modularity are associated with the formation of arm’s-length and joint-venture alliances respectively. Overall, IT architecture flexibility enhances the value of all types of alliances, especially collaborative alliances. Effectively, these results suggest that in collaborative-intensive alliances, reconfiguration of resources and modification of processes can be facilitated by appropriate investments in IT.