The impact of information technology on financial performance: the importance of strategic choice

Abstract

Information technology (IT) may not automatically improve firm profitability. It is an essential tool, but not sufficient in itself, and should therefore be coupled with organisational factors such as business strategies. A firm can maximise the value from its IT investments by aligning them with business strategies because IT improves scope economies and coordination. This paper examines empirically the contribution of IT to financial performance as measured by net profit, ROA, and ROE by focusing on the alignment of IT with business strategies such as vertical disintegration and diversification. Empirical analysis shows that IT does not directly improve financial performance. In conjunction with vertical disintegration and diversification, however, it does improve financial performance as measured by net profit. Financial performance ratios such as ROA and ROE, however, are not correlated with the alignment (or interaction) factor of IT with vertical disintegration and diversification. The results indicate that increased IT spending improves net profit, but not performance ratios such as ROA and ROE, of firms with decreased vertical integration and higher diversification.