Week3_Ray et al(2009)_Xue Guo

Competitive Environment and the Relationship Between IT and Vertical Integration 

In this paper, authors mainly discussed two questions: 1. How does the competitive environment moderate the relationship between IT and VI (vertical integration)? 2. How does the level of VI in different competitive environments influence firms’ performance (coordination and production cost)? Basically, this paper examines the relationship of four constructs: IT, VI, competitive environment and firm performance.

Previous literature showed that IT is associated with a decrease in VI. However, this paper examines that different competitive environments have various impacts on the relationship between IT and VI. Moreover, the authors found that the level of VI may affect the firms’ performance based on diverse competitive environment.

The paper empirically examines the model using firm-level IT spending data from 1995 to 1997. Two measures of the competitive environment are demand uncertainty and industry concentration that complement each other and the measures of firm performance are coordination cost and production cost. The paper uses 2-equation model, which run both directions (from IT to VI and VI to IT) to examine the first question, which can address the endogeneity problem between IT and VI.

The results suggest that in uncertain demand and in unstable competitive environment, IT is associated with decreased VI. And in more predictable and concentrated environment, IT is associated with increased VI. Also, the paper found that firms made rational strategies about VI and IT in different competitive environments to decrease the coordination and production cost. Compared with the previous literature, this paper provides a more refined understanding of the relationship between IT and VI.