Effects of organizational structure and information technology capability on organizational effectiveness in emerging markets

ABSTRACT

This paper reports the results of a study designed to investigate the effect of organizational structure and information technology capability on organizational effectiveness. Data on organizational structure, information technology capability and organizational effectiveness were collected from 110 firms in two emerging markets. Findings indicate that the three components of information technology capability are all positively related to organizational effectiveness and organic structure is also positively related to each of the components of information technology capability. The study confirms that information technology capability leads to increased organizational effectiveness. It also shows that organic structure is a key determinant in the development of information technology capability.

1. INTRODUCTION

The developing world, in which more than 80% of the world's population resides, currently owns a mere 4% of the world's computers, though the number of computers in many of these countries is growing rapidly (Davison et al., 1999). In the context of emerging markets, IT is seen as one of the most significant forces of modernization, yet researchers have not provided consistent results about the relationship between IT and organizational effectiveness even in developed countries. Whether IT will increase organizational effectiveness in developing countries and some determinant factors that will enable IT to work more efficiently in order to increase a firm's organizational effectiveness are some important issues which need to be addressed. Emerging markets provide a unique opportunity to examine of relationships between organizational structures and information technology at an early stage of organizational development.

The link between information technology (IT) and organizational effectiveness has been studied for years, yet empirical studies have produced mixed and even conflicting results (e.g., Weber and Pliskin, 1996; Jurison, 1996). One prevalent stream of research depicts IT as positively related to organizational effectiveness (e.g., Vandenbosch and Huff, 1997; Jurison, 1996; Capon and Ramsay, 1997), while another finds little relationship between these two constructs (e.g., Brynjolfsson, 1993; Weber and Pliskin, 1996). The conflicting findings have lead to a realization that achieving organizational effectiveness in order to reach better firm performance through information technology may be more difficult than initial reports suggested. The quick development of IT has expanded its advantage beyond the tangible IT assets themselves. Another promising stream of IT research illustrates that it is not IT per se, but IT capability that confers sustainable competitive advantage (e.g., Bharadwaj, 2000; Ross et al., 1996). As one kind of organizational capability that has been empirically tested for the positive relationship with organizational effectiveness (Eisinger, 2002), IT capability is argued to be positively related to organizational effectiveness.

There is also considerable research depicting the relationships between organizational structure and IT (e.g., Louadi, 1998; Clemons and Row, 1991) and organizational structure and organizational effectiveness (e.g., Bhargava and Sinha, 1991). Studies have shown that organizational structure has the potential to improve the overall effectiveness of organizations (e.g., Srivastava and Cooperrider, 1987). Researchers have found that an organic structure is more effective than a mechanistic one in improving overall organizational effectiveness (e.g., Bhargava and Sinha, 1991).

The interaction between organizational structure and information technology has been widely examined (e.g., Vandenbosch and Huff, 1997; Alexander and Randolph, 1985; Louadi, 1998). Louadi argues that there is some interaction effect on firm performance between IT and organizational structure and that highly organic structure and IT adoption will lead to the highest information processing ability and ultimately affect organizational effectiveness. However, this research does not provide a generalizable model about the relationships among IT, organizational structure, and organizational effectiveness. In order to better understand the relationships mentioned above, this paper employs organizational structure as our independent variable and proposes that it will improve the organizational effectiveness via IT capability. The research question is how organizational structure increases a firm's organizational effectiveness via IT capability. Besides investigating the relationship among organizational structure, IT capability, and organizational effectiveness, this study also compares the differences of these variables in two emerging markets. An earlier version of this paper discussed differences in the Chinese and Vietnamese markets and the possible effects of these differences on IT capability and performance (Zhang, McCullough, and Ren, 2004). The current paper focuses on the relationship between the variables.

2. LITERATURE REVIEW

The model in Figure 1 presents the proposed relationship between IT capability and organizational effectiveness and between organizational structure and IT capability.

[FIGURE 1 OMITTED]

2.1 Organizational Effectiveness (OE)

The concept of OE is central to the investigation of organizational structures, processes, and outputs. The main purpose of all organization development is to increase effectiveness in organizational performance and to improve organization health with the ability to remain effective. Organizational researchers and organizational executives both need assistance because there is no commonly accepted approach to the measurement of organizational effectiveness (Hitt, 1988). Thus, an evaluation of effectiveness can be a cornerstone to help detect the existing problems and possible solutions. Since the current research focuses on the organizational effectiveness in emerging markets, the measurement of OE may include the ability to anticipate surprises, responsiveness to market change, and reduced redundancy of information/knowledge. Thus, Gold et al.'s (2001) scale was adopted in the current research.

2.2 IT and IT capability

The pace of change is so rapid that theorists believe that how organizations manage change is critical for their futures (Rockart et al., 1996). In the rapidly changing business environment, uncertainty and equivocality become major obstacles for firms (Daft and Lengel, 1986). Information technology then becomes a vehicle for helping firms to reach their business goal more effectively.

The literature strongly emphasizes IT as a powerful competitive weapon. However, researchers debate whether the competitive advantage that IT applications provide is sustainable. Resource based analysts (Mata et al., 1995) argue that IT as a high order resource, if harnessed, will lead to competitive advantage. Other research (e.g., Ross et al., 1996; Bharadwaj, 2000) argues that IT as a resource could be easily duplicated and thus could not lead to sustainable competitive advantage. Rather, it is the IT capability that will distinguish firms applying IT from each other.

Bharadwaj (2000) took the resource-based perspective again and defined IT capability as "a firm's ability to mobilize and deploy IT-based resources in combination or copresent with other resources and capabilities" (p.171). Adopting Grant's classification scheme, Bharadwaj divided IT-based resources into three categories: IT infrastructure, human IT resources, and IT-enabled intangibles. The overall IT infrastructure comprises the computer and communication technologies and the shareable technical platforms and databases (Ross et al., 1996). The critical dimensions of human IT resources include technical IT skills and managerial skills (Capon and Glazer, 1987). IT-enabled intangibles here mean customer orientation, knowledge assets, and synergy. Since Bharadwaj's definition is more generalizable, this study will adopt her definition as a guideline throughout the paper.

2.3 Organizational Structure

Structure is probably the most investigated organizational characteristic in organizational literature. It institutionalizes how people interact with each other, how communication flows, and how power relationships are defined (Hall, 1987). The structure of an organization reflects the value-based choices made by the company (Quinn, 1988); it refers to how job tasks are formally divided, grouped, and coordinated.

Researchers have conceptualized organizational structure from different perspectives. March and Simon (1958) defined organizational structure as the hierarchical relations among members of the organization. Child (1972) conceptualized it in terms of the allocation of tasks and responsibilities between individual organization members and groups to ensure effective communication and integration of effort. In the same vein, Hall (1987) argues that organizational structure institutionalizes how people interact with each other, how communication flows, and how power relationships are defined.

In this paper, we adopt Khandwalla's (1977) classification of organization structure. According to Khandwalla (1977), organization structure can take many forms, ranging from highly mechanistic to highly organic. Mechanistic structures are typically highly formalized, non-participative, hierarchical, tightly controlled, and inflexible. Organic structures, on the other hand, are characterized by informality, decentralization of authority, open channels of communication, and flexibility (Khandwalla, 1977). Based on above, in this study, the organizational structure is viewed as facilitating interaction and communication for the coordination and control of the organization's activities. Considering the characteristics of IT capability, it can be argued that organizational structure will have some interaction with IT capability.

3. CONCEPTUAL FRAMEWORK

3.1 IT capability and organizational effectiveness

Eisinger (2002) argues that organizational capability has a positive impact on organizational effectiveness. He found that the presence of paid staff and the ability to obtain information and use it strategically via information technology in order to manage the challenge of maintaining congruence between resources and demands are the critical elements of organizational capacity that contribute to organizational effectiveness. The so-called ability in this study has the same attributes with IT capability. As mentioned above, IT capability is defined as "a firm's ability to mobilize and deploy IT-based resources in combination or co present with other resources and capabilities" (Bharadwaj, 2000, p. 171). Based on these components, it can be argued that IT capability has a positive relationship with organizational effectiveness too.

Hypothesis 1 Superior IT capability is positively related to organizational effectiveness

IT Infrastructure. The IT infrastructure is a shared information delivery base, the business functionality (Keen, 1991). The overall IT infrastructure comprises the computer and communication technologies and the shareable technical platforms and databases (Ross et al., 1996). The infrastructure underpins a firm's competitive position by enabling initiatives such as cycle time improvement, cross-functional processes, and cross-selling opportunities (Sambamurthy and Zmud, 1992; Weill and Broadbent, 1998). Resource-based theorists contend that the IT infrastructure provides the resources that make feasible innovation and continuous improvement of products (e.g., Duncan, 1995; Venkatraman, 1991). The unique characteristics of the IT infrastructure that enable firms to implement the right applications at the right time render the cost and value of technological innovation different for different firms. A valuable technology asset is essential for integrating systems and making IT applications cost effective in their operation and support (Ross et al., 1996). The logic presented above suggests the following proposition:

Hypothesis 1a: Superior IT infrastructure is positively related to organizational effectiveness

Human IT Resource. Organizational human resources include the training, experience, relationships, and insights of its employees (Barney, 1991; Grant, 1995). The human IT resource comprises two critical dimensions in this study. They are technical IT skills and managerial skills (Bharadwaj, 2000). Technical skills are those related to programming, systems analysis and design, and competencies in emerging technologies. Managerial skills include abilities such as the effective management of IS functions, coordination and interaction with the user community, and project management and leadership skills (Capon and Glazer, 1987; Copeland and McKenney, 1988; Mata et al., 1995).

Bharadwaj (2000) argues that firms with strong human IT resources are able to integrate the IT and business planning processes more effectively; conceive of and develop reliable and cost effective applications that support the business needs of the firm faster than the competition; and communicate and work with business units more efficiently while anticipating future needs of the firm and innovating valuable new product features before their competitors. The logic described above suggests the following proposition:

Hypothesis 1b: Superior human-IT resources are positively related to organizational effectiveness

IT-enabled intangibles. IT is a resource that generates competitive value only when it leverages or enables pre-existing firm resources and skills. There are many enabling roles of IT with respect to several organizational intangibles (Quinn and Baily, 1994). This study illustrates three key dimensions of organizational intangibles, which are customer orientation, knowledge assets and synergy (Bharadwaj, 2000).

The positive impact of customer orientation on firm performance has been widely documented (e.g., Jaworski and Kohli, 1993; Narver and Slater, 1990). A key capability for superior customer orientation is the ability to track and predict changing customer preference, especially in volatile markets. IT enables firms to track shifts in customer choices much more rapidly and effectively. As for knowledge assets, it is embedded in the skills and experience of its employees, as well as in its processes, policies, and information repositories. Effective knowledge management is an inherently social process that requires tremendous organizational change. Synergy refers to the sharing of resources and capabilities across organizational divisions. Knowledge and information sharing across functional units enables firms to be more flexible and efficient in responding faster to market needs (Brown and Duguid, 1998). So, it can be argued:

Hypothesis 1c: Superior IT-enabled intangibles are positively related to organizational effectiveness

3.2 Organizational Structure and Organizational Effectiveness

Organizational structure institutionalizes how people interact with each other, how communication flows, and how power relationships are defined (Hall, 1987). It takes many forms, ranging from highly mechanistic to highly organic. Mechanistic organizations have highly structured, restricted information flow. The operation styles are uniform and restricted. All decision-making is based on formal lines of management position. These organizations are reluctant to adapt and emphasize formally established procedures. Superiors make decisions with minimum consultation and involvement of subordinates and through sophisticated control systems. Organic organizations are open, with a free flow of information throughout the organization. Their operational styles vary freely, and decision-making is based on the expertise of the individual. They have loose, informal control with emphasis on a norm of cooperation. Participation and group consensus are highly encouraged.

As mentioned above, IT capability is a firm's ability to mobilize IT related resources copresent with other resources and capabilities. It consists of three components: IT human resources, IT infrastructure, and IT enabled intangibles. To develop IT capability, a firm needs to develop a flexible operation style. This requires an open communication system and strong cooperation between departments. Additionally, in order to develop superior IT capability, a firm needs to be innovative and willing to accept adaptation. Organic structure provides such an environment for developing superior IT capability. Thus, we propose that organic structures encourage firms to develop information technology capability. Firms with organic structure will develop IT capability more easily. Based on this, it can be argued that:

Hypothesis 2: Organic structure is positively related to IT capability

Hypothesis 2a: Organic structure is positively related to IT infrastructure

Hypothesis 2b: Organic structure is positively related to human IT resources

Hypothesis 2c: Organic structure is positively related to IT-enabled intangibles

4. METHODS

4.1 The sample

A convenient sample of firms with varying levels of IT activities in P.R. China and Vietnam was surveyed using personal interviews with a structured questionnaire. In total, 122 interviews were conducted resulting in 110 completed and valid questionnaires. The sample firms are small and medium businesses. All of these firms are involved primarily in manufacturing and service activities. Approximately 20 different industries are represented in the sample. They conduct different kinds of business, including children's garments, optical products, ceramic products, insecticides, and construction. Among the 110 completed questionnaires, 61 are from China and 49 are from Vietnam.

4.2 The measures

To measure information technology capability, organization structure, and organizational effectiveness measures adapted from existing scales were employed. King and Leo's (1996) scale is adapted to measure information technology capability. The eight items from their scale were divided into three sets to measure the three components of IT capability. Organization structure was measured using a scale adapted from Khandwalla (1976/1977). The respondents were asked to indicate on Likert-scales the extent to which each item of the measure characterizes the structure of their firms. Organizational effectiveness was measured using the scale developed by Gold et al. (2001). Data were analyzed using liner regression.

4.3 Analysis and Results

The conceptual model shown in Figure 1 identifies the relationships between organizational structure, information technology capability, and organizational effectiveness. This model illustrates the hypotheses relationship between these constructs. Table 1 presents means, standard deviations, and correlations among the variables studied. Correlations between the dependent variable and independent variable provide initial evidence for our hypotheses; and simple regression was used to test for significance.

[FIGURE 1 OMITTED]

Table 2 summarizes the results of the hypothesis testing. In H1 through H1c, we posited that the organic structure would result in superior IT capability and each of the three components. All hypotheses were statistically significant. For organizational effectiveness, F=28.80 (d.f.=104) and the IT capability variable explained 22% of the variance. Hypothesis 1 proposed that IT capability would positively affect organizational effectiveness. As shown in Table 4, the estimate of 0.722 is statistically significant (t=5.37, p=0.000), suggesting support for H1. H1a involves the effect of one of the component of IT capability, human IT resources on organizational effectiveness. The estimate of 1.718 is also statistically significant (t=5.58, p=0.000), suggesting strong support for H1a. In H1b, we expect that the second component, IT infrastructure, would also affect organizational effectiveness. The estimate of 1.484 of IT infrastructure is shown to be statistically significant (t=4.40, p=0.000), supporting fully for H1b. In H1c, we expected that IT enabled resources would influence organizational effectiveness. The significant estimate of 2.587 (t=4.56, p=0.000) confirms our hypothesis.

Hypothesis 2 states that organization structure should affect the development of IT capability. We further posited that the more organic the structure, the more superior the IT capability and its components would be. The four equations testing the hypotheses confirmed our argument. The regression coefficient for organic structure is 0.857, which is statistically significant (t=6.44, p=0.000), supporting H2. In H2a, b, and c, the estimates of 0.339, 0.333, 0.178 are all significant (t=5.58, p=0.000; t=6.06, p=0.000; t=5.40, p=0.000), supporting H2a, b, c.

5. DISCUSSION AND IMPLICATIONS

In this paper, we investigated IT capability's influence on organizational effectiveness and the role of organic structure on the development of such capability. The results show that IT capability does lead to higher organizational effectiveness and that building superior IT capability may require flexible structure to foster its development. Thus, we suggest that firms must have organic structure in order to fully develop their IT capability.

In addition, IT capability is a multidimensional construct. The three components all have strong influence on organizational effectiveness and will all be influenced by organizational structure. IT capability has been conceptualized by different researchers in different ways. In this research, it composes three different components: human related resources, IT infrastructure, and IT enabled resources. To develop superior IT capability, it is suggested that firms pay attention to these three resources. Ignoring any one of them will cause trouble.

6. LIMITATIONS AND RESEARCH IMPLICATIONS

As with all research our study has its limitations. Of some concern to us was the low R-square. There might be some other variables that could explain more variance left undiscovered in this research. In addition, since there is no consensus on the concept of organizational effectiveness but given that there are certain characteristics that appear to be similar in most research, limiting a study to a particular area is recommended. IT capability is a promising but not well-studied construct. The antecedents of developing IT capability remain unclear. Its relationship with organizational effectiveness might also be contingent upon some other organizational factors (i.e., resources, culture, etc.). Future research should embody some internal factors as well as other external factors that might seem to affect the organizational effectiveness of a firm.

7. CONTRIBUTION

The major contribution of this paper is the integration of three important constructs, IT capability, organizational structure, and organizational effectiveness, into one study. Existent research focuses either on information technology-organizational effectiveness (e.g., Vandenbosch and Huff, 1997; Jurison, 1996; Capon and Glazer, 1997) or information technology-structure relationship (e.g. Louadi, 1998). A major theoretical contribution of this paper is that it expands the IT -OE literature by incorporating IT capability as an independent variable and explores its relationship with organizational effectiveness and organizational structure.

Concerning managerial contributions, firm managers, especially of exporting firms, which are faced with heterogeneous and dynamic environments, can benefit from understanding the significance of IT capability and organizational structure appropriate for fostering such a capability. Such firms can enhance their organizational effectiveness by developing IT capability and building organic structure. Information technology plays a critical role in business performance. Inclusion of information technology capability can add more to the understanding of organizational effectiveness. It is also hoped that this paper has provided some insights on IT capability-organizational structure-organizational effectiveness relationships.

Table 1 Preliminary Correlation Analysis

                            Mean    Std. Dev.    Human    Inf.

Human IT Resource            9.9    2.7          1.0
(Human)
IT infrastructure (Inf.)    10.4    2.5          0.9      1.0
IT-enabled                   7.6    1.5          0.6      0.7
resources (Enable)
IT capability (ITC)         27.8    6.2          0.9      1.0
Organizational              51.0    9.6          0.5      0.4
effectiveness (OE)
Organizational              25.1    3.7          0.5      0.5
Structure (OS)

                            Enable    ITC   OE

Human IT Resource
(Human)
IT infrastructure (Inf.)
IT-enabled                  1.0
resources (Enable)
IT capability (ITC)         0.8       1.0
Organizational              0.5       0.5   1.0
effectiveness (OE)
Organizational              0.5       0.5   0.4
Structure (OS)

Table 2 Results of Hypothesis Testing

       Dependent             Independent      Estimates    T-value
       Variables              Variables

Organizational              IT capability     0.722        5.37
effectiveness
F=28.80(1, 104)
R2=0.22
Organizational              IT                1.484        4.40
effectiveness               infrastructure
F=19.34 (1,104)
R2=0.16
Organizational              Human IT          1.718        5.58
effectiveness               resource
F=31.17 (1,105)
R2=0.23
Organizational              IT enabled        2.587        4.56
effectiveness               resources
F=20.82 (1,104)
R2=0.17
IT Capability               Organic           0.857        6.44
                            Structure
F=4.47 (1,103)
R2=029
IT infrastructure           Organic           0.333        6.06
                            Structure
F=36.67 (1,104)
R2=0.26
Human IT                    Organic           0.339        5.58
resource                    Structure
F=31.14 (1,104)
R2=0.23
IT enabled                  Organic           0.178        5.40
resources                   Structure
F=29.14 (1,103)
R2=0.22

       Dependent            Significance    Hypothesis     Result
       Variables                              Tested

Organizational              0.000 ***       H1            Supported
effectiveness
F=28.80(1, 104)
R2=0.22
Organizational              0.000 ***       H1a           Supported
effectiveness
F=19.34 (1,104)
R2=0.16
Organizational              0.000 ***       H1b           Supported
effectiveness
F=31.17 (1,105)
R2=0.23
Organizational              0.000 ***       H1c           Supported
effectiveness
F=20.82 (1,104)
R2=0.17
IT Capability               0.000 ***       H2            Supported

F=4.47 (1,103)
R2=029
IT infrastructure           0.000 ***       H2a           Supported

F=36.67 (1,104)
R2=0.26
Human IT                    0.000 ***       H2b           Supported
resource
F=31.14 (1,104)
R2=0.23
IT enabled                  0.000 ***       H2c           Supported
resources
F=29.14 (1,103)
R2=0.22

* p<0.05; ** p<0.005; *** p<0.001

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Author Profile:

Man Zhang is currently a Doctoral Candidate of International Business at Washington State University. James McCullough earned his PhD from the University of Washington in 1976 and currently is Director of the School of Business and Leadership and George Frederick Jewett Chair in International Business, University of Puget Sound, and Ying Wei Ren is an Assistant Professor at Southwestern University of Finance and Economics in China.

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