Business value of partner’s IT intensity: value co-creation and appropriation between customers and suppliers

Abstract

There is a rapid increase in the use of enterprise technologies, such as enterprise portals, CRM, RFIDs, and partner interface systems. Often defined as Enterprise 2.0 technologies, social communication technologies, such as blogs and wikis are further increasing the range of ITs used by firms. Greater use of these Enterprise 2.0 technologies is changing the ways organizations transact with partners, as IT systems become predominant means to communicate, coordinate, analyse, conceptualize, and respond. As these technologies increase the information content of work, IT intensity of firms is becoming an increasingly important asset for doing business. To leverage enterprise technologies, firms are increasing IT intensity by making greater investments in more modular, user-friendly, integrated, and customized ITs. Greater IT intensity changes how a firm transacts business and inter-organizational relationships. However, the effects of increased IT intensity on inter-organizational relationships are not clear. In this study, we address this gap and assess how a firm’s IT intensity influence inter-organizational value. Using the data from customer-supplier dyads, we examine partner-related value creation, co-creation, and appropriation of value between firms within customer-supplier relationships. Using the Compustat database as our source of financial information from publicly-traded firms, we identify 5868 unique dyadic pairs of customer-supplier over the period 1991 to 2005 and hypotheses are tested using a sample of 15,028 customer-supplier dyad-years. IT spending for each firm is based on data available from InformationWeek magazine. Our results indicate that a partner’s IT usage co-creates value for both partners. We show a strong positive relation between customer and supplier IT spending intensity and corresponding profitability— measured as the firm’s excess gross profit relative to industry levels — for both customer and supplier firms as well as the combined dyad. Also, contrary to views that larger customers exploit smaller suppliers, our study finds that an increased IT intensity enhances the probability of value being generated for both the partners in a dyad.