The Effects of Cross‐Functional Integration on Profitability, Process Efficiency, and Asset Productivity

Abstract

We employ information processing theory (IPT) to posit beneficial impacts of internal integration on firm profitability and its underlying components of process efficiency and asset productivity. We further hypothesize that these effects are greater for firms that operate wider spans of supply chain processes. These expectations are tested with the combination of two different data sources: primary data collected to gauge levels of internal integration, and secondary data collected from financial reports including profitability performance and related financial ratios. The results provide evidence that internal integration mainly affects profits by driving process efficiencies. These efficiencies appear to be especially significant in sales, general, and administrative related costs for firms that have broad process spans. In contrast, the data analysis offers no evidence of a relationship between internal integration and asset productivity. Based on these findings, we point out important implications for the applicability of IPT in explaining the effects of internal integration, and identify a call for action for practitioners. Overall, our study enhances both the rigor and relevance of internal integration research by grounding it in IPT, by utilizing objectively reported financial data, by identifying specific cost benefits, and by studying the impact of process span as an important contingency.