Competition and Value in the Digital Age

Competition and Value in the Digital Age:

AWhy veering off-center can land some

firms in a performance sweet spot

by Aurora Abt A recent study in Information Systems asserts that a non-conformist approach in IT strategy gives family-owned companies a competitive edge in building value. The study valuation for risk takers who dare to outspend competitors, as well as those who underplay digital investments. can be challenging. For consumers, purchases simply are either technology we need or a misstep in purchasing strategy can result in considerable consequences. While smart competitive position, can these same choices

“Concentrated ownership, such as founding-family ownership, is an effective ownership structure that leads firm deviation in IT investment toward increasing firm value.” – Professor Joanna L. Ho

The Red Queen Strategy: How Companies Play to Win

of IT Overinvestment and Ho, professor of accounting, examined IT investment strategies and the resulting performance of and her co-authors Feng Tian (PhD Alum), Anne Sean Xu (PhD Alum), explain that before investing in new technology, typically companies consult purchasing trends in their industry to determine how much to spend and in which areas. The study – eager to appear competitive – purchase IT at levels similar to the technological capabilities of its competitors. For example, a photo-sharing website offers Cloud storage to free up space on computer hard drives while keeping photos secure and organized in one location. Almost as quickly Cloud services among photo-sharing websites are then widely available. However, the researchers note that some companies venture beyond the industry IT norm – whether by overinvesting or underinvesting – and the study researchers

Independent Thinking Builds Value

The researchers found that, in fact, making IT investment decisions in line with industry norms is not likely to improve performance. in stock valuation resulted from the strategy of overinvestment, or spending more than the industry average. Surprisingly, even underinvestment yielded greater gain in company value than following the industry norm. Further, the likely to take greater risks to enhance performance than their competitors. whether those resources are then used to gain competitive advantage through some non-IT approach, like outsourcing or partnerships, would depend on the effectiveness of management said Ho.

Technology Recharges Company Value

IT investment deviation: Family firms edge out nonfamily firms across all studied IT investment strategies, yet overinvestment yields the greatest gain in stock value for both groups.

Tobin’s q

0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00 Nonfamily firm

Family firm

Underinvestment = high Overinvestment = high No deviation (i.e., IT capital = indusrty mean)

IT investment deviation

with fewer owners has a management team that mechanisms. The result is a deeper understanding of its operations and staff – warts and all. Such weaknesses gives tight-knit management the upper hand in effective decision-making. are often led by a revolving door of multi-tiered

Still, the researchers believe that both groups are motivated by the prospect of equity-based interest in securing increased valuation. ownership, such as founding-family ownership, is

Evaluating corporate IT investment is increasingly important in light of the frequency of new product offerings and digital advances. In convention (hosted by Consumer Technology Association), more than 3,800 companies debuted new and upcoming tech products and joint digital

The researchers believe that reckless overinvestment can damage the legitimacy of firm leadership and begin to erode hard-earned valuations. However, one successful trend in IT spending – and value building – is the revamp among educational institutions with the offering of online classes.

However, while digital providers may tempt or seen as excessive by the public or shareholders researchers believe that reckless overinvestment begin to erode hard-earned valuations.

Digital Transformation in Education

One successful trend in IT spending – and value building – is the revamp among educational institutions with the offering of online classes. Feeding the pipeline for online university enrollment is K-12 homeschoolers. These non-traditional learners access online schools, which make creative use of IT, and boast live interaction using webcams, microphones, and headsets. Via a computer, students can share research project with classmates (in real time or through messaging) all over the world. Commuting and time zones are no longer issues. An internet connection brings digital learning to the masses.

The Transformative Ability of IT Investments

As the researchers found, the perceived reasonableness of IT investments can share the thought process behind IT purchases with shareholders in a bid to build support and increase understanding of risk and reward. For businesses, IT investments can lead to a cost-effective platform for sharing information with consumers and employees nationally or globally. The savings from reduced travel expenses alone may be enough to substantiate purchases and garner shareholder support.

Professor Joanna L. Ho is a professor of Accounting in the UCI Paul Merage School of Business. She holds both a BBA and MBA from the National Taiwan University, and a PhD from the University of Texas at Austin. Her current research interest is the interrelationship of compensation and performance incentive plans at companies operating in a variety of countries, including the United States, China, Japan, and Taiwan.