Dual Information Technology Strategy and Firm Performance: Insights from a Deep Learning Approach

Abstract

This study provides new insights on how dual information technology (IT) strategy and other investments such as IT investments and selling, general and administrative (SGA) investments jointly influence profitability of the firm. Following recent work, we conceptualize IT strategy in terms of revenue emphasis, cost emphasis, or a dual-emphasis in which both revenue and emphasis goals are simultaneously pursued. We use the novel and AI-based state-of-the-art textual analysis technique, the BERT model, to infer firms’ IT strategies from corporate disclosures, including annual reports Form 10-Ks, and earnings conference call transcripts. We fine-tune Google’s BERT model on manually annotated IT strategy statements and achieve satisfactory classification accuracy on hold-out dataset. We replicate prior findings using survey-based IT strategy variable by using the inferred IT strategies based on BERT to provide confidence in the new BERT measure of IT strategy. We then extend prior work by assessing how dual IT strategy helps to leverage high SGA investments for superior profitability. Our analyses suggest that IT strategic emphasis plays an important role in moderating the relationship between SGA investments and firm performance such that dual-emphasis firms also have a steeper SGA–profitability relationship than either revenue- or cost-emphasis firms. Overall, these findings imply that at higher levels of SGA investment, dual-emphasis in IT strategy has higher pay offs. From a methodological perspective, this study shows the value of the novel AI method for inferring IT strategy that complements prior survey-based approaches.