Information & Management 35 (1999) 43±51

Research
Information technology and ®rm performance: Linking with
environmental, strategic and managerial contexts
Mingfang Li*, L. Richard Ye1
College of Business Administration and Economics, California State University, Northridge, 18111 Nordhoff Street,
Northridge, CA 91330-8245, USA

Received 10 October 1997; accepted 4 August 1998

Abstract

The performance impact of information technology (IT) investment is an important research topic that needs to take into
consideration the role of key contextual factors. This study discussed and empirically tested the moderating effects of
environmental dynamism, ®rm strategy, and CEO/CIO arrangement on the impact of IT investment on ®rm performance. The
study sample consisted of major US corporations. The empirical results, based on a moderated regression modeling approach,
provided preliminary evidence supportive of the hypotheses advanced in this paper. Speci®cally, IT investment appears to have
a stronger positive impact on ®nancial performance when there are greater environmental changes, more proactive company
strategy, and closer CEO/CIO ties. According to our ®ndings, companies considering IT investment should assess their
environmental contexts, strategic directions, and top management team arrangement to allow CIO's a more strategic role.
# 1999 Elsevier Science B.V. All rights reserved

Keywords: Information technology; Economic performance; Environmental dynamism; Company strategy; CEO/CIO
relationship

1. Introduction (e.g. [9, 14, 57]). While business periodicals often

We are witnessing both the rapid evolution of
information technology (IT), and accelerated invest-
ment in it by organizations concerned about their
market competitiveness. Increasingly, companies
demand and expect future growth and pro®tability
to come from productivity gains achieved through
continuous investment in IT and similar innovations
*Corresponding author. Tel.: +818-677-2421; fax: +818-677-
4903; e-mail: mingfang.li@email.csun.edu
1
E-mail: richard.ye@email.csun.edu
0378-7206/99/$ ± see front matter # 1999 Elsevier Science B.V. All rights reserved
PII: S-0378-7206(98)00075-5
report vivid stories of IT investments leading to either
actual or perceived payoffs, rigorous and systematic
assessments suggest that the picture is far from clear.
Meanwhile, never has there been more pressure on
management to make informed decisions so that any
perceived positive impact of IT on ®rm performance
will indeed be realized.
During the past decade a great deal of attention has
focused on the impact of IT investment. However,
studies have frequently generated controversial or
inconsistent results. For example, after reviewing
previous research, Loveman concludes that corporate
44 M. Li, L.R. Ye / Information & Management 35 (1999) 43±51
IT investment has had practically no impact on pro-
ductivity [41]. Meanwhile, others have reported obser-
ving varying degrees of positive performance impact
due to IT investment (e.g. [4, 7, 11, 13, 30, 43, 54, 58]).
Increasingly, researchers realize that the relation-
ship between IT investment and ®rm performance is
complex and multifaceted. Some contend that mea-
surement problems, methodological de®ciencies, and
the poor quality of data sets may have contributed to
the so-called productivity paradox of information
technology [7, 12]. Others suggest that since IT
investment is inherently related to company strategy
[8, 36, 42, 49, 53], the relationship between IT and ®rm
performance should be studied within a strategic
management framework. While both ideas are sound,
the latter points at a very important and promising
direction of IT research. It provides a more powerful
theoretical framework within which our present inves-
tigation was conducted.
Although the extant literature has made signi®cant
strides towards explaining IT's performance implica-
tions, we believe a deeper understanding can be
achieved by linking IT's business value to contextual
aspects that are critical to strategic management:
environmental; strategic; and managerial factors.
Thus, our research question is: how do a ®rm's IT
investment and environmental, strategic, and manage-
rial factors together in¯uence ®rm performance. Here,
we report an empirical study that probed the IT and
performance relationship within the context of a ®rm's
external environment, its strategies, and its managerial
arrangement for the IT function.
2. Theoretical bases
Many believe that the central purpose of investment
in IT is to achieve competitive advantages and better
®rm performance [26, 49, 52]. According to the
resource-based view of ®rms [5, 20, 59], companies
invest in areas that together form a resource con®g-
uration that provides competitive advantages. While
the transaction cost theory suggests that a ®rm is the
displacement of market mechanics [18, 60], strategy
researchers point out that this, as an organizing format
for economic activities, entails more than just displa-
cement [56]. Various activities take place in organiza-
tions over time. These help build competitive
advantages that can not otherwise be obtained via
the market. Application of IT in ®rms is part of these
activities. As such, the investment is an integral part of
a ®rm's attempt to gain competitive advantages and to
deal with a ®rm's external and internal challenges.
Sethi and King [55] have summarized ®ve widely
recognized bene®ts of IT investment; they are opera-
tional ef®ciency, operational functionality, improved
positions in competitive environments by fending-off-
threats, preemptiveness, or being the ®rst mover and
thus having timing advantage, and synergy. Ef®ciency
and functionality are related to the internal facets of an
organization. Fending-off-threats and preemptiveness
are related to external facets of the organization.
Finally, synergy is related to overall integration, lever-
aging of resources, and competence building. Firms
may utilize speci®c bene®ts of IT, as their situations
dictate. The external environment will present differ-
ing challenges to ®rms. A dynamic environment, for
example, may require ®rms to pursue preemptiveness
and fending-off-threats as bene®ts of IT. The strategies
®rms pursue require different resource con®gurations.
A ®rm with an external orientation, for example, may
use preemptiveness and fending-off-threats, but a ®rm
with an internal orientation may concentrate on ef®-
ciency and functionality. Finally, how IT is integrated
into a ®rm's operation will have an impact on the
synergy bene®t that can be generated from the IT
investment. A critical indication of IT's integration
in an organization is the CEO/CIO relationship.
Therefore, we expect that the performance impact
of IT is likely to be moderated by these three con-
textual factors. Fig. 1 shows our model.
With multiple, and often con¯icting demands from
various stakeholders, a ®rm's performance objectives
are multidimensional. There is no one single objective
that can effectively capture overall performance. The
studies of IT's performance implications have used
measures such as pro®tability, growth, values to
Fig. 1. A conceptual model of IT and performance relationship.
 M. Li, L.R. Ye / Information & Management 35 (1999) 43±51
customers, and reactions of stock market. For business
®rms, two groups of measures may serve as a basis for
performance assessment. They are growth measures
such as sales growth, and pro®t measures such as
return on assets (ROA) and return on sales (ROS).
The former is indicative of how effectively a ®rm can
open up new markets or expand in existing markets.
The latter shows the ef®ciency of its operation. Firms
may also emphasize one measure over another as their
environments and strategies require.
The environment is the totality of outside factors
considered by top managers in their decision-making.
Two frames of reference are used to describe the
environment. The ®rst divides the environment into
different segments, such as customers, competitors,
and governmental agencies. This helps identify rele-
vant factors in the environment. The second describes
the environment along a variety of critical character-
istics. Environmental dynamism appears to be a cri-
tical dimension of a ®rm's external environment [17,
22, 23, 38, 39]. It involves the degree and instability of
change in the ®rm's environment. In an environment
characterized by greater dynamism, top managers will
experience much more uncertainty, or lack of infor-
mation related to the current state of the environment,
potential impact of those developments on their ®rms,
and furthermore, strategic options available to them
[47]. In addition, environmental muni®cence appears
to be an important dimension that needs to be con-
sidered [23, 38]. It refers to the availability of
resources and support in the environment. These
two dimensions together present external challenges
to the ®rm [38]. Investment in IT may be an effective
way to provide timely and relevant information to top
managers and thus to help reduce uncertainty (e.g.
[1]). In addition, in a dynamic environment, trends and
developments transpire rapidly, while opportunities
come and go. In fact, the recent literature in strategic
management has begun to focus on time-based com-
petition. Investment in IT, therefore, will be effective
in a dynamic environment due to its preemptiveness
bene®ts. These considerations lead us to propose that:
H1: The greater the degree of environmental dyna-
mism, the stronger the impact of IT on performance.
Environmental muni®cence may have a direct
impact on the ®rm's performance, hence it is impor-
45
tant to incorporate it as a control variable. Environ-
mental dynamism, we believe, moderates the IT and
performance relationship. Therefore, we offer no
hypothesis linking muni®cence with the IT and per-
formance relationship.
In general, strategy attempts to achieve an align-
ment between a ®rm's external environment and its
resource con®guration [21, 46]. Two important
aspects of a company's strategy are its product-market
scope [48] and its competitive approach [50]. Firms
adopting different strategies will tap into different
bene®ts of IT investment. For example, a ®rm pursu-
ing a differentiation strategy may explore the opera-
tional functionality bene®t of IT, and a ®rm pursuing a
cost leadership strategy may rely upon the operational
ef®ciency bene®t. Furthermore, a ®rm pursuing a
product-market expansion strategy may tap into the
preemptiveness bene®t and realize its IT impact on
growth. Capturing a central dimension of strategy
presented a challenge for us, as strategy is multi-
dimensional in nature. Recent developments in stra-
tegic management practice seems to suggest that
companies are combining both cost leadership and
differentiation advantages. In addition, the strategy
typology proposed by Miles and Snow [46] seems to
present three viable strategies, prospector, analyzer,
and defender, along a key dimension of external
orientation. This external orientation taps into both
product-market scope expansion, and competitive
approach. We consider this a reasonably parsimonious
dimension of strategy. Firms with greater external
orientation may need to depend on the preemptive-
ness, fending-off-threats, functionality, and synergy as
bene®ts of IT investments, while ®rms with greater
internal orientation may only need to depend on
ef®ciency and fending-off-threats. It stands to reason
that ®rms with greater external orientation may
require more IT investments. Therefore, we propose
that:
H2: The greater the ®rm's external orientation (as
re¯ected in a ®rm's market expansion and product
development), the stronger the impact of IT on per-
formance.
The extent to which a speci®c area is a strategic part
of an organization is re¯ected in its top management
team. It is a crucial group that is charged with navigat-
46 M. Li, L.R. Ye / Information & Management 35 (1999) 43±51
ing the future of a company. To ful®ll its strategic task,
top managers need to consider both external chal-
lenges and internal integration. Those areas that are
critical to a ®rm will be represented by top managers
in more powerful positions [27, 28, 29, 32]. A dimen-
sion of group structure important to this study is the
distance between the CEO and the Chief Information
Of®cer (CIO) [45]. To the extent IT is an integral and
strategic part of an organization [34], the CIO would
probably assume an important position in the organi-
zation [25], closer to the CEO. Indeed, there are
signi®cant relationships between the rank of a CIO
and a ®rm's IT competitive orientation, and the impor-
tance given to IT planning [35, 51]. There is evidence
that a ®rm's extent of IT deployment in business
strategies and value-chain activities is often in¯uenced
by the CIO's participation in top management teams
[3]. Moreover, a resource-based analysis seems to
suggest that, compared to other IT resources, the
relationship between IT management and the rest of
the ®rm is the most important contributor to any
sustainable competitive advantage [44]. We therefore
expect that the strategy and managerial arrangements
will affect the type and extent of IT impact on ®rm
performance. This leads to the hypothesis:
H3: The better IT is integrated into a ®rm's strategic
management, the stronger the impact of IT on perfor-
mance.
3. Methods
3.1. Study sample
Three sources were used to assemble the data set for
this study. For ®rm strategy, performance, and industry
classi®cation, we used the COMPUSTAT database.
For ®rm investment in information technology and
CEO/CIO relationship we used the annual survey
provided by InformationWeek. Finally, the assessment
of environmental dynamism and muni®cence was
made at the industry level, hence we used the industry
level data made available in U.S. Industrial Outlook
(1994) published by the US Department of Com-
merce.
Although the data for IT investment were primarily
from US ®rms, we felt that, as a ®rst step, we might
bene®t from concentrating on the experience of ®rms
in a single country with reasonable data availability.
The InformationWeek magazine has been conduct-
ing a survey of major US corporations for its annual
report on IT investment for several years. During its
span of IT survey, there have been substantial changes
in its survey methodologies. Our evaluation has shown
that the basic survey methodology has been relatively
consistent since 1992. Because our study also needed
to obtain data from COMPUSTAT, and U.S. Industrial
Outlook, we compiled a database of US ®rms that have
IT data, ®rm strategy data, environmental data, and
performance data available between 1992 and 1994.
The resultant study sample included 216 ®rms
across the span of three years. This included ®rms
in all major industries in the US economy. Unfortu-
nately, the InformationWeek data set on IT-related
matters provided information about only a portion
of the 500 ®rms it features each year. However, our
data analytical approach demanded a larger sample
size [2]. Meanwhile, we needed to make sure that ®rm
strategy and performance measures were available
from the COMPUSTAT database. Given the pooled
cross-sectional and time-series nature of the database
for our study, we had 513 observations (Of the 216
®rms in our database, some ®rms have only two years
of information.).
3.2. Measures
3.2.1. IT investment
The data from the InformationWeek annual survey
reveal the IT budget for each given year for the major
®rms in the US economy. For a measure of IT invest-
ment, we divided IT budget by total assets to provide
an indicator of a ®rm's relative investment in the ITarea.
3.2.2. Environmental dynamism
One of the three contextual variables, environmen-
tal dynamism, was operationalized as the standardized
variation in industry-level sales revenue over the last
®ve years. We regressed annual industry sales data
over ®ve years for each industry at a four-digit SIC
level (a level management scholars believe to be
appropriate) against time, and divided the standard
error of the beta coef®cient by the average annual sales
revenue for each industry to obtain the index of
environmental dynamism for each industry.
 M. Li, L.R. Ye / Information & Management 35 (1999) 43±51
3.2.3. Strategy orientation
Often the realized strategic orientation of a ®rm has
been measured by one of two forms of resource
allocation. One is ef®ciency, while the other is market
expansion [24, 61]. In this study we used an index of
market expansion vs. ef®ciency to assess a ®rm's
strategic orientation. Speci®cally, we divided the
sum of marketing and R&D expenses by capital
expenditure. Marketing and R&D expenditures re¯ect
an attempt to expand a ®rm's product-market. Capital
expenditure re¯ects an emphasis on ef®ciency. The
ratio between the two constitutes a parsimonious
measure of a ®rm's strategic orientation, as re¯ected
in the resource allocation already taken [40].
3.2.4. IT-strategy integration
We measured, in this study, the integration of IT
with company strategy by the reported relationship
between the CIO and CEO [45]. Speci®cally, if the
CIO is also the CEO, the CEO/CIO distance is 1. If the
CIO reports directly to the CEO, the distance is 2. If
the CIO reports to someone who then reports to the
CEO directly, the distance is 3, etc.
3.2.5. Firm performance
Measuring ®rm performance has been a major
challenge. Being a multidimensional construct, per-
formance may not be effectively assessed by using any
single indicator [15]. We therefore used two variables,
ROA and ROS, in our study. ROA focuses on the
overall performance of the ®rm. It is measured as net
income divided by total assets. ROS avoids the effects
of differential asset valuation methods across ®rms,
and the impact of new investment and depreciation. It
is measured as net income divided by total sales
revenue. As such, it represents a ®rm's ability to
generate income from sales revenue.
3.2.6. Control measures
This study also included three control variables.
The ®rst is the debt-to-equity ratio. Because this ratio
re¯ects a ®rm's risk-taking tendency and the relative
control of ®nancial community on the ®rm [6], we
believe its potential impact on ®rm performance must
be controlled. The second is environmental muni®-
cence. We regressed industry level revenue against
time, and divided the beta coef®cient by the average
industry sales revenue over ®ve years to obtain a
47
standardized index of this variable [23]. The third is
®rm size. We used the reported number of employees
as its proxy measure. Greater size may entail not only
size and scope economies [16] but in¯exibility and
administrative costs as well [33]. Although it is not a
central variable here, it is apparent that its role should
be controlled for in studies related to ®rm perfor-
mance.
3.3. Analysis
Various scholars propose interactive regression
modeling as an effective approach for studying mod-
erating phenomena [2, 10, 19, 31]. We therefore
selected this method to study the moderating impacts
of three contextual variables on the relationship
between IT investment and ®rm performance. This
modeling approach essentially involves creating pro-
duct terms between independent variables and mod-
erating variables and entering both product terms and
their respective main effects into the regression equa-
tions. Speci®cally, we used environmental dynamism,
®rm strategy, and the CEO/CIO arrangement as mod-
erating variables, and IT investment as the key inde-
pendent variable. We therefore created multiple
product terms between moderating variables and IT
investment. A statistically signi®cant product term
indicates a moderating impact. Speci®c directions
of moderation will be determined by the signs of
regression coef®cients related to these variables.
Table 1 presents both the descriptive statistics and
correlation matrix for the sample investigated in this
study.
The empirical tests of the hypotheses were per-
formed by means of the two interaction regression
equations shown in Table 2. ROA and ROS were used
as dependent variables. Two methodological consid-
erations are critical when analyzing pooled cross-
sectional and time-series data sets [37]: the data set
may be autocorrelated over time (within the same unit
of observation) and heteroskadastic across units of
observation. However, our analyses using a variety of
estimating methods led us to use the ordinary least
square regression (OLS) procedure. First, as there is
only a three-year time span, the threat of autocorrela-
tion is minimal. We tested the models using the mean
values for each unit of observation over time and
derived the same conclusion as the OLS procedure.
48 M. Li, L.R. Ye / Information & Management 35 (1999) 43±51

Table 1
Descriptive statistics and correlation matrix a

Variables Mean SD 1 2 3 4 5 6 7 8 9

1. Dynamism 0.01 0.01 1.00

2. Strategy 0.68 0.91 0.09 1.00
3. CIO/CEO distance 2.59 0.70 0.02 0.11 1.00
4. IT investment 0.03 0.04 0.01 0.11 0.13 1.00
5. Munificence 0.03 0.03 0.25 0.18 0.05 0.10 1.00
6. Debt equity ratio 0.90 1.03 0.01 0.04 0.12 0.00 0.08 1.00
7. Size (log employees) 3.22 1.11 0.22 0.14 0.00 0.03 0.03 0.02 1.00
8. ROA 0.02 0.10 0.07 0.05 0.00 0.05 0.12 0.17 0.01 1.00
9. ROS 0.03 0.09 0.06 0.03 0.03 0.01 0.17 0.20 0.11 0.85 1.00
a
Nˆ513; for absolute value of r>0.08, p<0.05, for absolute value of r>0.12, p<0.01.

Table 2
Regression results a

Independent variables Regression models

ROA ROS

B  t B  t

Dynamism 1.44 0.11 0.91 0.40 0.03 0.27

CEO/CIO distance 0.00 0.01 0.19 0.00 0.01 0.16
Strategy 0.00 0.03 0.44 0.01 0.01 0.11
IT investment 0.12 0.05 0.48 0.28 0.13 1.19
IT* dynamism 29.32 0.15 0.87 59.06 0.30 1.84 b
IT* strategy 0.17 0.08 0.90 0.10 0.05 0.54
Strategy* distance 0.01 0.05 0.82 0.02 0.12 2.20 b
Strategy* IT* distance 0.08 0.03 0.38 0.17 0.06 0.92
Strategy* IT* dynamism 51.71 0.15 2.19 b 16.33 0.05 0.73
Debt equity ratio 0.01 0.16 3.68 d 0.01 0.18 4.35 d
Munificence 0.45 0.13 2.75 c 0.66 0.20 4.23 d
Firm size (log of employees) 0.01 0.06 1.26 0.01 0.14 3.19 c
Constant 0.03 2.06 b 0.05 3.37 d
R2 0.06 0.12
Adjusted R2 0.05 0.10
F 3.39 d (dfˆ12 500) 5.63 d (dfˆ12 500)
a
Nˆ513.
b
p<0.05.
c
p<0.01.
d
p<0.001.

Furthermore, we tested the same models using a 4. Results and discussion

heteroskedastic-consistent procedure (as implemented
in the TSP statistical software) in order to remove the
latter threat. The results obtained from the two dif-
ferent procedures are consistent. As indicated by the F
statistics for the equations, both equations are statis-
tically signi®cant.
The most important ®ndings of this study have
been highlighted in bold font in Table 2. For the
regression model with ROA as the dependent vari-
able, the three-way interaction term among strategy,
IT, and environmental dynamism is statistically
 M. Li, L.R. Ye / Information & Management 35 (1999) 43±51
signi®cant, and exhibits the predicted direction.
Speci®cally, we conclude that for ®rms operating
in a more dynamic environment and with an exter-
nally oriented strategy, greater IT investment will
lead to better pro®tability. For the regression model
with ROS as the dependent variable, the two-
way interaction term between IT and dynamism is
statistically signi®cant in the predicted direction.
Speci®cally we conclude that for ®rms in a more
dynamic environment, greater investment in IT
will lead to better performance. In addition, the
interaction term between strategy and CEO/CIO
distance is statistically signi®cant, and in the
predicted direction. Speci®cally we conclude that
with a greater external orientation, a greater distance
between CEO and CIO will lead to poorer perfor-
mance.
These ®ndings provide some evidence that IT's
performance impact is dependent upon several crucial
contextual factors. The research results suggest that
®rms need to make greater investment in IT if they are
in more dynamic environments and are also pursuing
more externally oriented strategies. Furthermore,
making investment in IT itself is not suf®cient. Firms
must integrate IT into their strategic management
process.
Several observations can be made for the impact of
control variables. For both dependent variables, the
debt-to-equity ratio and environmental muni®cence
seem to be positively related to performance, while
®rm size appears to be negatively related to perfor-
mance.
We are mindful of potential delimitation of
this study. First of all, constrained by the data
availability and out of consideration for comparability
with other studies of IT-performance relationship,
we only applied our conceptual model to a small
sample of ®rms in the US economy, and these
®rms are predominately large. While we were
successful in providing evidence on IT's positive
performance impact in relation to several key
contexts, our ®ndings might not be generalizable
to medium- and small-size ®rms, or to ®rms with
headquarters in other countries. Secondly, we only
used two performance-related variables; growth-
related variables might also be important for a better
understanding of the relationship between IT and
performance.
49
5. Conclusions
Our study attempted to determine the links between
three key contextual factors and IT's performance
impact. We proposed that a ®rm's external environ-
ment (depicted primarily by the degree of environ-
mental change or dynamism), its strategic orientation,
and its integration of IT into the overall strategic
picture of the ®rm would in¯uence the business value
of IT investment. Our analyses provided evidence
supportive of these hypotheses.
These ®ndings have important theoretical and prac-
tical implications. Our understanding of the IT-per-
formance relationship can be signi®cantly expanded if
we take into consideration the impact of key contex-
tual factors. This may help remedy the problems that
have resulted from the relatively simplistic conception
of a direct relationship between IT and performance.
Furthermore, the IT community, as well as company
management teams, will bene®t from this improved
understanding.
For future research, several directions may be con-
sidered. Replications of this study with different set-
tings should be useful. These may include ®rms with
different sizes (i.e. small and medium), and ®rms in
other countries. Additional dimensions might be
explored. For example, cooperative strategies such
as strategic alliances and joint ventures are becoming
increasingly important. How ®rms involved in such
strategies might utilize IT investment should be of
great interests to the IT community. Finally, the
performance impact of IT is likely to be more evident
as companies gain experience through their continu-
ous efforts over time [12, 53]. Longitudinal studies
will be necessary to provide any insight in such
cumulative effects of IT investment.
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Mingfang Li is Associate Professor of Management in the College
of Business Administration and Economics, California State
University, Northridge. He received his Ph.D. in Strategic Manage-
ment from Virginia Polytechnic Institute and State University. His
research focuses on environmental change and organizational
response, company strategy and performance, top management,
global strategies, and application of emerging technology in
strategic management. His work has appeared in a variety of
management outlets including Strategic Management Journal,
Journal of Applied Management Studies and Advances in
International Comparative Management.
L. Richard Ye is professor of Management Information Systems in
the College of Business Administration and Economics, California
State University, Northridge. He received his Ph.D. in Management
Information Systems from the University of Minnesota. His
research interests include expert systems, computer-based training,
and the business value of IT. His work has appeared in various
journals including MIS Quarterly, Expert Systems with Applica-
tions, and International Journal of Man-Machine Studies.