erp systems as an enabler of sustained business process innovation: a knowledge-based view

Journal of Strategic Information Systems 16 (2007) 51–69

www.elsevier.com/locate/jsis

ERP systems as an enabler of sustained businessprocess innovation: A knowledge-based view

Thongchai Srivardhana a,*, Suzanne D. Pawlowski b,1

a Graduate School of Commerce, Burapha University, Bangkok Education Center, 14th Floor,

United Center Building, Silom Road, Bangkok 10500, Thailandb Louisiana State University, Information Systems and Decision Sciences Department, 3185 CEBA,

Baton Rouge, LA 70803-6312, USA

Received 25 November 2005; accepted 20 January 2007Available online 6 March 2007

Abstract

This research examines the relationship between ERP systems and innovation from a knowledge-based perspective. Building upon the multi-dimensional conceptualization of absorptive capacity byZahra and George [Zahra, S.A., George, G., 2002. Absorptive capacity: a review, reconceptualiza-tion, and extension. Academy of Management Journal 27 (2), 185–203], a theoretical framework isdeveloped to specify the relationships between ERP-related knowledge impacts and potential/real-ized absorptive capacity for business process innovation. The implication of the knowledge-basedanalysis in this paper is that ERP systems present dialectical contradictions, both enabling and con-straining business process innovation. The model highlights areas where active management haspotential to enhance the capabilities of a firm for sustained innovation of its business processes.Future research directions are also outlined.� 2007 Elsevier B.V. All rights reserved.

Keywords: Enterprise resource planning systems; Absorptive capacity; Business process innovation

0963-8687/$ - see front matter � 2007 Elsevier B.V. All rights reserved.

doi:10.1016/j.jsis.2007.01.003

* Corresponding author. Tel.: +66 2 231 1270 2; fax: +66 2 231 1273.E-mail addresses: [email protected] (T. Srivardhana), [email protected] (S.D. Pawlowski).

1 Tel.: +1 225 578 2507; fax: +1 225 578 2511.

mailto:[email protected]

mailto:[email protected]

52 T. Srivardhana, S.D. Pawlowski / Journal of Strategic Information Systems 16 (2007) 51–69

1. Introduction

The research in this paper challenges conventional beliefs about the relationshipbetween enterprise resource planning (ERP) systems and business process innovation.While common views of ERP systems as constraining and inflexible (‘‘like cement, the crit-ics say – highly flexible in the beginning, but rigid later’’ (Davenport, 2000, p. 16) seemincommensurate with the notion of innovation, the analysis presented in this paper revealsa different picture. Rather than focusing exclusively on the structural constraints that thesesystems impose, we direct attention to the impacts of an ERP system on the knowledgecapabilities of the organization. In contrast to prevailing views, a knowledge-based per-spective reveals that ERP systems have the potential to significantly enhance the capabil-ities of a firm for sustained innovation of its business processes. The implication of ouranalysis is that ERP systems present dialectical contradictions, both enabling and con-straining business process innovation. The theoretical model presented in this paper makesseveral important contributions. First, the model provides a foundation for understandingthe dialectical and often complex relationship between ERP systems and innovation.Moreover, the model highlights the ways that organizations can cultivate and leveragethe enabling elements to create enhanced business process innovation capabilities. Finally,the model provides a foundation for future empirical investigations to further explorethese relationships.

For many firms, an ERP system is critical to ongoing operations of the company andalso represents their largest IT investment. For these same organizations, knowledge capa-bilities (generation, combination-recombination and exploitation of knowledge) can pro-vide a source of competitive advantage (Conner and Prahalad, 1996; Grant, 1996; Kogutand Zander, 1996). The objective of the research in this paper, then, is to carefully examinethe relationship between the technological and operational capabilities provided by anERP system and the knowledge capabilities of the firm for sustained business processinnovation. Broadly defined, the process of innovation is the development and implemen-tation of new ideas in an organization, including inventions, imitations and adaptations(Van de Ven, 1986; Webster, 2004). The premise of the research presented in this paperis that an ERP system provides the potential for enhanced knowledge capabilities for busi-ness process innovation. The realization of these capabilities, however, is dependent on thedevelopment of associated social integration mechanisms for knowledge sharing, integra-tion and creation, and routines for innovation, learning and renewal. The research pre-sented here develops a theoretical framework to explore these ideas and to provide afoundation for future research to better understand organizational strategies to: (1) reducethe gap between the potential and realized knowledge capabilities enabled by ERP sys-tems, and (2) develop routines to utilize these capabilities for sustained business processinnovation. To this end, we build upon and extend the model of absorptive capacity byZahra and George (2002) to introduce a new theoretical framework – ERP Systems andBusiness Process Absorptive Capacity. In alignment with the original framework, businessprocess absorptive capacity is viewed as a dynamic capability influencing the firm’s abilityto create and deploy knowledge to build its business processes. The framework also incor-porates insights from prior research on ERP systems from a knowledge perspective andstudies on boundary spanning/knowledge brokering and information systems (Levinaand Vaast, 2005; Pawlowski and Robey, 2004; Volkoff et al., 2004). The resulting

T. Srivardhana, S.D. Pawlowski / Journal of Strategic Information Systems 16 (2007) 51–69 53

theoretical framework provides a more holistic picture of both the enablers and inhibitorsto process innovation related to ERP systems over the long term.

Before beginning the exposition of these ideas, a caveat is in order. While the frame-work presents both ERP-related enablers and inhibitors to business process innovation,the primary focus in the discussion is to highlight the enabling elements. It is important,however, to keep in mind that some characteristics of ERP systems (e.g., tight coupling,difficulty of customization) inherently create major challenges to some forms ofinnovation.

The paper begins with an overview of the conceptualization of absorptive capacitydeveloped by Zahra and George (2002) and a review of prior work on ERP systems froma knowledge perspective. The proposed theoretical framework is described next, includingpropositions. Finally, directions for future research are offered.

2. Background

2.1. Business process innovation, knowledge transfer and absorptive capacity

A business process is a set of logically related tasks performed to achieve a defined busi-ness outcome (Davenport and Short, 1990). Unlike product innovation, which is targetedtowards product development and commercialization activities, process innovation relatesto improving organizational processes, e.g., sequencing of work routines, informationflow. Our understandings of business process innovation are informed by the growingresearch on organizational learning and knowledge management. While different assump-tions about knowledge and its management are reflected in this research (Schultze and Sta-bell, 2004), information sharing/knowledge transfer (both within and across the boundaryof the organization) is seen as an essential element for innovation. Within an organization,cross-unit knowledge transfer can produce ‘‘creative abrasion’’ (Leonard-Barton, 1995),generate ‘‘improvisational sparks’’ (Brown and Duguid, 1991) and create new informationpatterns by rearranging information already in use and incorporating information previ-ously neglected (Isabella, 1990; Macdonald, 1995). Firms also actively seek externalknowledge, for example, by expanding their networks to learn about new practices andtechnologies (Kogut, 1988).

The challenge confronted by firms seeking to stimulate innovation through knowledgetransfer is captured in the concept of knowledge ‘‘stickiness’’ (Szulanski, 1996). Knowl-edge is ‘‘sticky,’’ or difficult to transfer, the more it is embedded in individuals, contexts,or locations, causing transfer to be slow, costly and uncertain (Kogut and Zander, 1993).One of the primary knowledge-related factors found to inhibit knowledge transfer withinan organization is the lack of absorptive capacity – the inability of the recipient to value,assimilate and apply outside sources of knowledge (Cohen and Levinthal, 1990; Szulanski,1996; Zahra and George, 2002). Absorptive capacity is also important in the transfer andadoption of knowledge from sources external to the firm. Drawing from the absorptivecapacity thesis, for example, a study on the role of alliances in the interfirm transfer oftechnological capabilities found similar resource bases among partners (a source of firmabsorptive capacity) to be a critical element in successful transfer/adoption (Moweryet al., 1996).

Absorptive capacity, the central concept in the model developed in this paper, was orig-inated by Cohen and Levinthal (1990) and defined as ‘‘a firm’s ability to recognize the


value of external knowledge, assimilate it, and apply it to commercial ends’’ (p. 128). Theunderlying premise is that prior related knowledge is needed to absorb and utilize newknowledge. Initially applied at the level of the firm, the concept has also been appliedat the business unit and team level (see, e.g., Tiwana and McLean, 2005). Firms exhibita high degree of variance in their level of absorptive capacity, impacting key areas of per-formance such as new product development, patents, licenses, etc. (Cohen and Levinthal,1990; Easterby-Smith et al., 2000). As one example, Usselman (1993) contrasts the absorp-tive capacity of IBM and its competitor, NCR, in responding to the advent of electroniccomputer technology in the early 1950s. Whereas IBM’s executives were able to recognizeand value opportunities in emerging computing markets, NCR was cautious in adoptingelectronic computer technology, even when heavily pressured by its major customers to doso. The experiences of GM in attempting to learn Japanese manufacturing and manage-ment skills in the early 1980s through its joint venture with Toyota (NUMMI) providesanother example of differences in absorptive capacity affecting knowledge transfer andexploitation, in this case at the division level. Although Saturn was able to apply muchof the knowledge from NUMMI, ‘‘GM had limited success in transferring those know-hows to its other divisions that lacked similar know-whys and know-wheres’’ (Lubatkinet al., 2001, p. 1361).

Because organizational memory and the transfer of knowledge within a firm are crit-ical elements of organizational learning (Rousseau, 1997), firms with higher levels ofabsorptive capacity tend to learn and perform better than firms with lower levels (Cohenand Levinthal, 1990). Absorptive capacity depends not only on the availability of newknowledge/information, but organization members also need the ability to convey theirlearning to one another and to develop common cognitive structures regarding the appli-cation of shared knowledge (Goodman and Darr, 1996; Rousseau, 1997). A firm’s levelof absorptive capacity, therefore, is not simply a sum of the ‘‘absorptive capacities’’ ofindividual employees and a firm cannot depend only on their employees to developabsorptive capacity (Cohen and Levinthal, 1990). In order to enhance and sustainabsorptive capacity, firms must go beyond human development strategies to developorganizational routines and processes to acquire, assimilate, transform and exploitknowledge.

It is our contention that the implementation of an ERP system provides new opportu-nities to acquire knowledge from external sources, develop common cognitive structuresamong employees from different functional areas, and implement new routines and pro-cesses to significantly increase the level of a firm’s absorptive capacity related to businessprocess innovation. ERP systems make new external knowledge available to an organiza-tion through the ‘‘best practices’’ embedded in the system as well as knowledge from ven-dors and consultants involved in system implementation and support. Moreover, thedeployment of an ERP system requires concerted energies throughout the organization,and intensity of effort (the amount of energy expended by organizational members to solveproblems) is one of the important elements contributing to the development of absorptivecapacity (Cohen and Levinthal, 1990; Kim, 1998). Furthermore, these enterprise systemscut horizontally across the organization, establishing new connections between organiza-tional units that may have been siloed in the past and creating opportunities for increasedabsorptive capacity of functional groups as knowledge that was local becomes morewidely shared.


2.2. Prior research – ERP systems and organizational knowledge

The research in this paper was motivated by the insights of earlier work on ERP sys-tems from a knowledge perspective. As shown in Table 1, the number of studies is lim-ited and the majority of the research to date has focused on knowledge issuesencountered during the system implementation phase or the ‘‘shake-out’’ period imme-diately following implementation. While our objective is to understand the relationshipbetween ERP systems and knowledge capabilities in the long term, the insights of theseinvestigations of the early stages in the system lifecycle provide strong indications ofopportunities for more enduring capabilities. The importance of knowledge transferand barriers to knowledge transfer are seen as consistent themes in these studies, con-firming that ERP system implementation requires intense and difficult work aroundknowledge issues. As described in the next section, it is this organizational knowledgework initiated during the implementation project that begins to provide the foundationfor future knowledge capabilities.

3. Conceptual model and propositions

In this section we introduce a new theoretical model of the relationships betweenERP systems and absorptive capacity for sustained business process innovation (seeFig. 1). The model builds upon the model of absorptive capacity by Zahra and George(2002) and also integrates insights from prior research on ERP systems, includinginhibitors to innovation. In alignment with the original framework, business processabsorptive capacity is viewed as a dynamic capability impacting the firm’s ability tocreate and deploy knowledge to build its business processes. Also consistent with Zahraand George (2002), potential and realized absorptive capacity are treated as distinct,albeit related, concepts. This distinction is an important one, analogous to March’s(1991) differentiation of exploration (e.g., search, experimentation, play) and exploita-tion (e.g., refinement, selection, implementation, execution) activities. While a firmmay have the ability to continually renew its knowledge stock (potential capacity), itmay be unable to exploit that knowledge (realized capacity). Conversely, a firm’s priorsuccess at exploiting new knowledge does not assure that they will avoid falling into acompetence trap in the future, unable to deal with new environmental challenges with-out continued exploration and access to external knowledge (Ahuja and Lampert,2001).

3.1. ERP systems implementation and the antecedents of absorptive capacity

In what ways does the implementation of an ERP system affect potential business pro-cess absorptive capacity? This question provides the starting point for the model. In theirgeneral framework, Zahra and George (2002) propose three antecedent factors: (1) expo-sure to diverse and complementary external sources of knowledge, (2) experience related tothe locus of a firm’s technological search, and (3) the intensity of activation triggers thatencourage a firm to respond to specific internal or external stimuli. In the discussion thatfollows, each of these factors is examined in the context of the implementation of an ERPsystem.

Table 1Knowledge-related ERP systems research

Reference Knowledge focus Phase – ERP system lifecycle

Baskerville et al. (2000) Impact of ERP on organizational knowledge (stock of knowledge, distribution,learning processes)

Implementation and post-implementation

Braa and Rolland (2000) Challenges of horizontal systems (e.g., ERP) as an information infrastructure –increasing interdependencies, reduced interpretive flexibility of artifacts and needto continuously negotiate and maintain interfaces

Implementation

Huang et al. (2001) Relationships (contradictory and complementary) of an organization’s ERPsystem and a knowledge management system; impacts on efficiency and flexibility

Post-implementation

Jones and Price (2004); Jones (2005); Joneset al. (2006)

Organizational knowledge sharing during implementation; sharing of tacitknowledge among project team members and with organization members;dimensions of organization culture that best facilitate knowledge sharing in ERPimplementation

Implementation

Klaus and Gable (2000) Senior managers’ (vendor, consultant and client) understandings of knowledgemanagement in relation to ERP systems – change management, corporateinformation management, and integrating change/corporate informationmanagement

Not specified

Ko et al. (2005) Transfer of ERP implementation knowledge from consultants fi clients ImplementationLee and Lee (2000) Transfer and internalization of business knowledge in the ERP software package

to the adopting organization (types of knowledge transferred, resolution ofconflicts with existing organizational knowledge, changed knowledge structure)

Implementation

Newell et al. (2004) Relationship between social capital and knowledge integration within a projectteam (bridging – external; bonding – internal)

Implementation

Pan et al. (2001) Nature, structure and process of knowledge integration during ERPimplementation; embedded knowledge [in organizational processes, legacy system,externally-based processes and the ERP system (post-implementation)]


Robey et al. (2002) Knowledge barriers related to the configuration of the ERP package, and barriersassociated with the assimilation of new work processes; approaches to address thebarriers

Implementation

Timbrell et al. (2001) Knowledge transfer from the vendor and implementation partner fi client;identified issues using Szulanski’s (1996) taxonomy (‘sources of stickiness’)

Implementation

Volkoff et al. (2004) Knowledge transfer from an enterprise systems developer team to the users of thenew enterprise system (across different communities of practice)


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• Knowledge embedded in the ERP system (e.g., “best practices”)

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-------------------------------------

OrganizationalKnowledge/Memory

• Expanded organizational knowledge (individual level)

• Increased knowledge in common (organizational level)

• Enhanced organizational memory capabilities –shared, accessible repository provided by the ERP system

Adapted from Zahra and George (2002)

SustainedBusinessProcess

Innovation

BUSINESS PROCESS ABSORPTIVE CAPACITY

PotentialAcquisitionAssimilation(PACAP-BP)

RealizedTransformation

Exploitation(RACAP-BP)

Activation Triggers

Social Integration Mechanismsfor ERP Implementation and Use

(emergent and formal)

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Fig. 1. Research framework – ERP systems and business process absorptive capacity.


3.1.1. Exposure to external knowledge sources

The implementation of an ERP system provides an organization with two new sourcesof external knowledge: (1) business knowledge embedded in the basic architecture of thesystem and business process reference models (labeled ‘‘best practices’’) (Lee and Lee,2000), and (2) the knowledge and expertise of consultants from the ERP software vendorfirm and other implementation partners (Ko et al., 2005; Lee and Lee, 2000; Timbrellet al., 2001).

ERP systems ‘‘contain deep knowledge of business practices accumulated from vendorimplementations in a wide range of client organizations’’ (Shang and Seddon, 2002,p. 272). These software packages are a source of diverse business knowledge, typically con-taining hundreds of business reference models covering a wide range of business processesand industries. Even though the initial exploration of these models may be limited, theadopted set of models (often a ‘‘standard’’ configuration recommended by the vendor)is likely to be very different from the firm’s legacy business processes. During implemen-tation, both the explicit business processes in these models, as well as the implicit non-canonical processes inherent in the ERP models begin to be transferred into the firm(Lee and Lee, 2000). Moreover, the full suite of models available in the package remainsavailable for examination and utilization in the future. Over the longer-term, new releasesof the software provide a continuing conduit for external knowledge as models are revisedor added by the vendor.

Consultants engaged to assist in the implementation of the ERP system are a secondmajor source of external knowledge. In addition to providing resources to complete imple-mentation tasks, another objective of client firms is the acquisition of system-relatedknowledge (implementation, operational, maintenance and training) (Ko et al., 2005;


Sumner, 2000). Consultants’ expertise may also include business process knowledge notdirectly related to the ERP system per se, including ideas and approaches garnered inengagements at other companies. The exchange of knowledge between organization mem-bers and consultants is intensive during the transition to the new system (Baskerville et al.,2000). Post-implementation, consultants may again be utilized to provide advice and sup-port for adjustments to the system or upgrades to new versions of the software.

Exposure to the knowledge embedded in ERP business reference models and the exper-tise of consultants contributes towards potential absorptive capacity in two ways. First,the diversity of knowledge available to the firm is increased. Knowledge diversity is a sig-nificant factor in learning because it increases the possibility that new incoming informa-tion will relate to what is already known, and also enables individuals to make novelassociations and linkages (Cohen and Levinthal, 1990; Lane et al., 2001). Second, theknowledge that can be drawn from these sources is complementary to existing knowledgein the firm, directly relevant to the firm’s core business processes and industry-specificpractices, strengthening the foundation for the innovation of these processes. This leadsto the first set of propositions:

Proposition 1a. Exposure to knowledge embedded in an ERP system (e.g., businessprocess reference models, system architecture) is positively related to a firm’s potentialabsorptive capacity for business process innovation (PACAP-BP).

Proposition 1b. Exposure to knowledge from ERP system consultants is positively relatedto a firm’s potential absorptive capacity for business process innovation (PACAP-BP).

3.1.2. Organizational knowledge and organizational memoryPrior experience and organizational memory affect a firm’s capabilities for future

knowledge acquisition by shaping both the locus of knowledge search and the processby which information is interpreted and acted upon (Walsh and Ungson, 1991; Weick,1979; Zahra and George, 2002). ERP systems impact the content and structure of organi-zational knowledge at the individual and organization levels (Baskerville et al., 2000; Leeand Lee, 2000). First, the jobs of users of the system become more complex, requiring abroader set of business knowledge as well as new technical/system knowledge (e.g.,cross-functional knowledge of processes, system configuration options) (Baskervilleet al., 2000; Robey et al., 2002). Similarly, IT professionals who provide support for thesystem require more extensive business knowledge as well as ‘‘package’’ knowledge(ERP software and bolt-on software) (Baskerville et al., 2000). At the individual level,these changes can expand the area of knowledge search and the ability to interpret andact upon incoming information. From the perspective of the organization, knowledgebecomes more focused, or ‘‘convergent,’’ as the knowledge sets of system users and IT pro-fessionals encompass both technical (system) knowledge and business (process) knowledge(Baskerville et al., 2000). Moreover, because ERP systems employ a single database for theentire enterprise, they require data standards (e.g., common field definitions and codes)across the organization (Gattiker and Goodhue, 2005). These changes serve to reducethe gaps between departmental/functional ‘‘thought worlds’’ in an organization, includingwhat they know (the fund of knowledge) and how they know (systems of meaning)(Dougherty, 1992). The increase of knowledge in common, in turn, can lead to a more


concerted and focused knowledge search, interpretation and action efforts from the per-spective of the organization.

Information technologies such as ERP systems also help an organization constitute itsmemory by providing a shared repository of organizational knowledge accessible to usersacross the enterprise (Goodman and Darr, 1996; Walsh and Ungson, 1991). An ERP sys-tem has advantages in terms of information maintenance and retention over individuals,who may either forget over time or leave the organization, and provides greater access tostored information from the company’s history relevant to its business processes.

Proposition 2a. Expanded organizational knowledge of individuals is positively related toa firm’s potential absorptive capacity for business process innovation (PACAP-BP).

Proposition 2b. Increased organizational knowledge in common at the organization levelis positively related to a firm’s potential absorptive capacity for business process innova-tion (PACAP-BP).

Proposition 2c. Enhanced organizational memory capabilities provided by an ERP systemis positively related to a firm’s potential absorptive capacity for business process innova-tion (PACAP-BP).

3.1.3. Activation triggers and intensity of effort

The relationship between external knowledge sources and organizational knowledge/memory and absorptive capacity is moderated by activation triggers, events thatencourage or compel a firm to respond to internal or external stimuli (e.g., organiza-tional crises, dramatic advancements in technology) (Kim, 1998; Walsh and Ungson,1991; Zahra and George, 2002). These events heighten the level of energy, or intensityof effort, expended to solve the problems faced by the company (Cohen and Levinthal,1990; Kim, 1998). In the presence of crises, ‘‘firms must invest heavily in the acquisi-tion of new tacit and explicit knowledge as well as in knowledge conversion activitiesto overcome the crisis in the shortest possible time’’ (Kim, 1998, p. 509). Several par-allels to these ideas are seen in a firm’s implementation of an ERP system. First, thedecision to implement an ERP system may be triggered by threats to the survival ofthe firm, perceived as ‘‘do-or-die’’ situations requiring the radical transformation ofbusiness processes. In addition, an ERP system is one of the most difficult types of sys-tems to implement, requiring the concentrated efforts of business units across the com-pany (Gattiker and Goodhue, 2005; Lee and Lee, 2000; Pan et al., 2001). Thesubstantial investment required for the software and related services such as consulting,implementation, training and system integration adds to the pressures and sense ofurgency (Pan et al., 2001).

A heightened intensity of effort extends well beyond system roll-out. The business sit-uation that prompted the adoption of the ERP system (e.g., severe competition withinthe industry) can remain a source of concern. Even more importantly, failures to achieveintended system benefits in terms of improved productivity and speed are common (Adamand O’Doherty, 2003; Newell et al., 2004), and the immediate post-implementation periodcan be critical to the realization of these benefits (Jasperson et al., 2005). During the post-adoptive period, sustained organizational efforts involving training and change manage-ment efforts can be crucial (Jasperson et al., 2005). Based on their study of post-adoptive


behaviors Jasperson et al. (2005), for example, recommend inducing periods of substantivetechnology use within the user community to stimulate learning. These types of actionscan be likened to a series of internally-generated activation triggers (or ‘‘crisis construc-tion’’ (Kim, 1998)) beyond the initial system roll-out.

Proposition 3. Activation triggers (during system implementation and post-implementa-tion) will influence the relationship between ERP-related knowledge sources/organiza-tional knowledge impacts and potential absorptive capacity for business processinnovation (PACAP-BP). Specifically, the intensity of the activation trigger(s) will bepositively related to the level of intensity to develop the requisite knowledge acquisitionand assimilation capabilities.

3.2. Potential fi realized absorptive capacity: social integration mechanisms

Potential and realized absorptive capacity are distinct but have complementary roles.Not only must a firm develop capabilities to recognize, acquire and assimilate usefulexternal information (potential), capabilities must also be developed to transform andexploit that knowledge in support of organizational goals (realized) (Zahra and George,2002). We expect that the transition from potential absorptive capacity related to ERPsystems to realized absorptive capacity for business process innovation is moderated bysocial integration mechanisms that facilitate knowledge sharing within the firm. A fun-damental assumption underlying the relationship between potential and realized absorp-tive capacity is that benefit is realized only when relevant knowledge is shared amongmembers of the firm and mutual understandings are developed (Garvin, 1993; Spender,1996; Zahra and George, 2002). While one advantage of an ERP system is that it is arepository of organizational knowledge (data, metadata, models, etc.) accessible to usersacross the enterprise, access to common information does not ensure a level of mutualunderstanding necessary for knowledge transformation and exploitation. Similarly,although the implementation of an ERP system leads to an increased level of knowledgein common across different functional areas, knowledge transformation and exploitationrequires cross-boundary learning and shared understandings beyond this initial level.Social integration mechanisms become an essential element in the realization of absorp-tive capacity because of their role in creating those shared understandings. Mechanismsmay be formal (e.g., a committee of designated power users) or informal (e.g., an emer-gent social network of users). Irrespective of their form, the qualities of these social rela-tionships are important since the success of knowledge exchanges and understandingdepends on factors such as the ease of communication and on the ‘‘intimacy’’ of theoverall relationship between the source and recipient (Adler and Kwon, 2002; Szulanski,1996).

The implementation of an ERP system provides multiple opportunities for enhancedsocial integration across the enterprise. The main drivers of these changes are the needfor knowledge transfer/integration during the project and increased cross-functional coor-dination following the implementation. Knowledge transfer/integration is essential to thesuccessful implementation of an ERP system and is also one of the most difficult projectchallenges. These knowledge tasks take different forms in terms of knowledge sources/recipients (e.g., vendor/consultants M organization; implementation team M users;knowledge embedded in software (ERP system and legacy systems) fi organization,


vendor/consultants; business unit M business unit),2 and the type of knowledge to betransferred (e.g., codified, non-canonical/tacit) (Baskerville et al., 2000; Jones, 2005; Koet al., 2005; Lee and Lee, 2000; Pan et al., 2001; Timbrell et al., 2001). Compoundingthe challenge is the need to understand and address misalignments between the ‘‘best prac-tices’’ embedded in the software and existing business processes, practices, values and cul-ture (Braa and Rolland, 2000; Hong and Kim, 2002; Jones et al., 2006; Liang and Xue,2005; Newell et al., 2000; Soh et al., 2003; Stijn and Wensley, 2001).

Organizations employ a number of strategies during the project to meet these chal-lenges. Fostering relationship development – interpersonal relations (one-on-one) andcommunity relations (group-based) – is an important issue during the implementation pro-cess (Pan et al., 2001). A common configuration for implementation teams, for example, isto include organization members from different functional areas/divisions, workingside-by-side with IT professionals from the organization and external consultants. Thesebusiness unit members act as subject matter experts and provide bridges to their homeorganizations (Newell et al., 2004). Team members may be co-located during the durationof the project, working together in an open-office environment or located into pods tofacilitate knowledge sharing, providing environments for the building of interpersonalrelationships and bonding (Jones, 2005; Newell et al., 2004). Other practices includesequestering the core team during configuration, ‘‘sleeping and eating together,’’ leadingto strong camaraderie (Robey et al., 2002).

The need for increased social integration across the enterprise continues after the sys-tem becomes operational. The tight coupling of business processes creates new interdepen-dencies with increased demands for collaboration and coordination across functionalboundaries and communities of practice (Braa and Rolland, 2000). The relationshipsformed among users from different business units and IT professionals as they spend timeworking together during implementation can provide a basis for ongoing social networks.These users may continue in a boundary-spanning role as ‘‘boundary-spanners-in-prac-tice’’ (Levina and Vaast, 2005), forming an informal, emergent community of practiceto share knowledge and coordinate activities across different units of the organization(Pan et al., 2001; Wenger, 1998). Returning to their work groups, they can also increasethe absorptive and retentive capacity of those units by acting as consultants to membersof their business units and enabling the transfer of contextualized business and analyticalknowledge as well as technical knowledge about the software (Baskerville et al., 2000;Volkoff et al., 2004). In some organizations, the official designation of a ‘‘power user’’ roleprovides a formal structure for knowledge sharing and coordination following implemen-tation (Baskerville et al., 2000; Jones and Price, 2004; Volkoff et al., 2004). In addition tousers, IT professionals who support the ERP system may be in a strategic position to actas knowledge brokers, transferring organizational knowledge across the boundaries ofbusiness units that may have been historically isolated from each other (Pawlowski andRobey, 2004). Each of these social integration mechanisms related to ERP systems canlower the barriers to information sharing and increase the efficiency of transformationand exploitation capabilities.

2 A fi B refers to as a one-way transfer of knowledge from source A to recipient B; A M B refers to reciprocalknowledge transfer between A and B.


Proposition 4. Social integration mechanisms (emergent and formal) related to ERPsystem implementation and use moderate the relationship between potential (PACAP-BP)and realized (RACAP-BP) absorptive capacity for business process innovation.

3.3. Realized absorptive capacity and sustained business process innovation

The final segment of the model relates the two dimensions of business process absorp-tive capacity to sustained business process innovation. These two elements work in tan-dem, making distinct contributions to knowledge capabilities leading to innovation.While knowledge transformation and exploitation (RACAP-BP) is the primary sourceof process improvements, sustained business process innovation requires continued replen-ishment/renewal of knowledge stocks and assimilation into the firm’s knowledge base(PACAP-BP) (Zahra and George, 2002). Firms must strike a balance between explora-tion-related capabilities and exploitation-related capabilities to maximize their perfor-mance (Vermeulen and Barkema, 2001).

Proposition 5a. Firms with more well-developed capabilities for business process-relatedknowledge acquisition and assimilation (PACAP-BP) are more likely to sustain higherlevels of business process innovation than those with less-developed capabilities.

Proposition 5b. Firms with more well-developed capabilities for business process-relatedknowledge transformation and exploitation capabilities (RACAP-BP) are more likely tosustain higher levels of business process innovation than those with less-developedcapabilities.

The last two elements of the model are factors that moderate the relationship betweenabsorptive capacity and innovation – regimes of appropriability and ERP systemconstraints.

3.3.1. Regimes of appropriability

An important factor influencing a firm’s decisions to act upon its capabilities for busi-ness process innovation is the regime of appropriability dominant in its industry (Zahraand George, 2002). Teece (1986), the originator of the term, defines a regime of appropri-ability as ‘‘the environment factors, excluding firm and market structure, that govern aninnovator’s ability to capture the profits generated by an innovation’’ (p. 287). Here,the issue is how able a firm can be in realizing advantage relative to its rivals through inno-vation of its business processes, including how long that advantage can be sustained. Inno-vations that can be quickly and easily imitated by other firms in an industry (a low regimeof appropriability) provide a lower incentive for a firm to invest its resources in becomingthe originator of innovations rather than a follower. In contrast, under high regimes ofappropriability (i.e., where knowledge spillovers are low and the firm is able to protectits knowledge assets) these investments can generate positive economic returns over thelong run (Zahra and George, 2002). The level of appropriability in an industry is affectedby the availability and effectiveness of various ‘‘appropriability mechanisms’’ (e.g., secrecy,regulation) to secure returns from innovative efforts (Cohen et al., 2000). Under strongregimes of appropriability, then, we would expect a significant positive relationshipbetween business process absorptive capacity and business process innovation; under weak


regimes of appropriability, we would expect a weak, or non-existent relationship betweenabsorptive capacity and business process innovation (Zahra and George, 2002).

Proposition 6. Industry regimes of appropriability moderate the positive relationshipbetween business process absorptive capacity and sustained business process innovation.Under strong regimes of appropriability, the relationship will be strengthened; under weakregimes of appropriability, the relationship will be weakened.

As a final comment on appropriability, it is important to note that while business processinnovations may be built upon ERP system best practices that are potentially available toall firms in an industry, best practices by themselves do not determine actions or businessprocess innovation outcomes. Although the ERP system components may be easily copiedand imitated, other organizational factors that shape business processes are not (e.g., cul-ture, organizational structures) (Levin et al., 1987; Damanpour, 1996; Tsai, 2001). More-over, as ERP system-based practices are enacted and elaborated in organizations, muchof the associated knowledge becomes tacit, idiosyncratic and difficult for imitators to copy(Nieto and Perez-Cano, 2004). The ability of firms in an industry to protect their advanta-ges arising from knowledge creation/innovation of business processes will be specific to thatindustry. The ease/difficulty of imitation will depend on both the nature of the innovationand the efficacy of protection (Teece, 1986). In some industries, business process innova-tions will be highly observable and hard to keep secret (weak regimes of appropriability),while in other industries business processes may be difficult to imitate because of lower vis-ibility or the skills/competences or complementary resources needed to exploit the knowl-edge (strong regimes of appropriability) (Levin et al., 1987; Zander and Kogut, 1995). Leadtime to implement changes and availability/form of legal protections are other examples ofindustry differentiators that may affect appropriability (Nieto and Perez-Cano, 2004).

3.3.2. ERP system constraints

Consistent with the fundamental idea advanced in this paper of ERP systems as facil-itating and inhibiting business process innovation, the second moderator incorporates twomajor constraints to innovation: (1) integration/tight coupling of the system and pro-cesses, and (2) difficulty of system change, including customization and upgrades.

The implementation of an ERP system increases the level of interdependence in the pat-tern of interactions among organizational units/departments (Orton and Weick, 1990). AnERP system is a structural coupling mechanism that provides a high level of integration,where integration is defined as ‘‘the process of achieving unity of effort among the varioussubsystems in the accomplishment of the organization’s tasks’’ (Lawrence and Lorsch,1967, p. 34). Moreover, ERP systems create two types of interdependence – sequential(the output of one unit becomes the input of another) and reciprocal (the outputs of eachpart become the inputs of the others) – that add to the complexity of the overall organi-zational system (Barki and Pinsonneault, 2005; Thompson, 1967). Integration can havepositive and negative impacts on an organization’s ability to adapt/change. On the onehand, organizational integration can promote responsiveness, enabling interdependentorganizational components to rapidly respond, adjust or adapt to the demands of othercomponents (Barki and Pinsonneault, 2005; Grant, 1996). On the other hand, specializa-tion/independent action by individual units is highly constrained. Change must be coordi-nated among all of the units that will be affected by the change, thus requiring a high levelof cooperation that may be difficult to orchestrate.


The second inhibitor for certain innovations is the inflexibility and complexity of theERP software itself. Typically, ‘‘vanilla’’ implementations have been recommended, withminimal customization, and changes can be difficult once the system is configured andimplemented (Kallinikos, 2004; Robey et al., 2002). Another obstacle to customizationis the effort required to reinstitute any modifications with future upgrades of the software.In the past, the most feasible option for many organizations has been to work within thepre-specified range of configuration options provided by the software package. Althoughcustomers can lobby their ERP vendor for changes to the package in future versions, thereis no guarantee that the vendor will decide to make the requested changes. Even in the bestscenario there will still be a time lag until the new version is released. The extent of theseconstraints and the organization’s ability to mitigate them depend on factors such as theease of reconfiguration, responsiveness of the vendor and in-house capabilities for IT sup-port. These observations lead to our final proposition:

Proposition 7. ERP system constraints (tight integration/coupling and arduousness ofsystem customization/change) moderate the positive relationship between business processabsorptive capacity and sustained business process innovation in such a way that therelationship is weaker when the constraints are higher.

A few additional comments are warranted before leaving this topic. First, it is importantto recognize that while an ERP system can present constraints to some types of change,innovation of business processes is possible without modifications to the system itself. Someprocess innovations do not have system implications and only require changes to elementsof the process external to the system. Secondly, even in situations where system customiza-tion is required to implement an innovation, adaptation choices vary widely in terms of levelof difficulty and implications for future upgrades. Options for customization, for example,can include: configuration, bolt-ons, screen masks, extended reporting, workflow program-ming, user exits, ERP programming, interface development, package code modification andlinking the ERP system to other systems (Ahituv et al., 2002; Brehm et al., 2001). Third, oneof the most important evaluation criteria for ERP package selection is ease of customization(Keil and Tiwana, 2006), and some ERP vendors are beginning to seek market advantagethrough offering added customization features, including extensive customization capabil-ities without the need for source-code changes. New frameworks are also being developed toaid in decision-making about customization choices and the capabilities required to imple-ment them (see, e.g., Luo and Strong, 2004). As a final note, while the structure of the systemconstrains organizational and individual action, the eventual outcome is not simply one oftechnological determinism but rather the result of the interaction of human agency and tech-nological constraints (Markus and Robey, 1988). One of the key findings of a study of anERP implementation in a government agency by Boudreau and Robey (2005), for example,was that users engaged in a period of improvisation and ‘‘reinvention’’ of the system, enact-ing a number of tweaks and workarounds as a response to the technology’s limitations andtheir own limited knowledge as new users. The enactment of technology is an ongoing pro-cess and constraints are often malleable, at least to some degree.

4. Conclusion

The framework presented in this paper offers a new theoretical perspective of ERP sys-tems and business process innovation. Employing a knowledge-based approach and Zahra


and George’s (2002) multidimensional view of absorptive capacity, we seek to present amore balanced and comprehensive picture of the impacts of ERP systems on innovationcapabilities. The main theme of this paper is that an understanding of the impacts ofERP systems on innovation of business processes requires recognition of the opportunitiesas well as the constraints. Overemphasis on the structural constraints presented by ERPsystems may hinder the pursuit of innovation of business processes by organizations. Incontrast, our analysis focusing on the concept of business process absorptive capacityhighlights the opportunities ERP systems can provide, enabling organizations to buildnew capabilities to create and deploy knowledge to improve business processes. Clearly,neither view alone provides an adequate understanding. Rather, new perspectives areneeded that incorporate the dialectical contradictions of ERP systems as enabling andconstraining business process innovation. The model presented in this paper is one stepin that direction.

The work in this paper also makes a valuable contribution by providing a conceptualbridge between two important streams of research – post-implementation ERP systemresearch and work on the organizational antecedents of absorptive capacity (Jansenet al., 2005). Our adaptation of Zahra and George’s (2002) general model to the contextof ERP systems in organizations preserves the richness and multidimensionality of theabsorptive capacity concept, thus providing a foundation for cross-contributions betweenIS/management studies on the topic. This is currently an active area of managementresearch that IS researchers can both draw upon and contribute to in the future. Theframework developed in this paper, for example, could be used in empirical studies tounderstand the relationships of other IT-related organizational antecedents with the differ-ent dimensions of absorptive capacity. Our work also resonates with emerging theory onthe impacts of organizational integration as seen in the recent work by Barki and Pinson-neault (2005). Their analysis suggests that organizational integration ‘‘can simultaneouslyimprove organizational efficiency and flexibility, two organizational performance conceptsfrequently pitted against each other in the traditional organization theory literature’’(p. 172). They specifically identify higher innovation rates as one of the potential benefitsof functional integration of administrative/support activities of a company’s processchain.

Based on our discussion, several topics for future research can be identified. The intentis not to set a research agenda, but rather to suggest some broad areas of investigation.The propositions provide a starting point for empirical examination of the knowledgeimpacts of ERP systems and business process innovation. Three areas, in particular, havepotential to yield insights with important implications for practice and warrant deeperexploration in the near term. The first topic involves questions related to the antecedentsof potential business process absorptive capacity. Here, it is important to gain a betterunderstanding of the factors that influence the assimilation of knowledge embedded inan ERP system. Little is known, for example, about organizational practices surroundingthe visibility/adoption of new business reference models or about practices that fosterpost-implementation learning by users beyond the immediate requirements of routinetasks. A second topic deserving priority attention concerns the social interactive processesrelated to ERP systems that enable cross-functional knowledge transfer and integration.These investigations have the potential to contribute new insights into knowledge pro-cesses and learning involving complex boundary objects such as ERP systems and bound-ary spanning (formal and emergent) (Levina and Vaast, 2005; Star and Griesemer, 1989).


Third, there is a need to broaden the scope of inquiry in ways that reflect the dialecticalrelationship between the structural constraints and enabling knowledge capabilities ofERP systems related to business process innovation. Theories that can incorporate theseelements as mutually constitutive, such as adaptive structuration theory (DeSanctis andPoole, 1994), may prove fruitful in understanding the organizational tensions that canarise with these systems. Of particular interest in these studies would be the examinationof workarounds (at the individual and organizational level) to structural constraints.Finally, returning to the key research question that motivated this paper, a critical elementof all of these inquiries will be to begin tracing the linkages of ERP-related knowledgeimpacts on business process innovation outcomes.

In conclusion, this paper contributes an initial understanding of the relationshipbetween ERP systems and business process innovation. By viewing this relationshipthrough the lens of absorptive capacity, we draw attention to the potential of ERP systemsto provide knowledge capabilities to support business process innovation and set a foun-dation for advancing this line of inquiry. Given the complexity of ERP systems and theconstraints they present, the realization of these benefits will be extremely challenging.As organizations move more fully into the post-adoptive stage of the ERP system lifecycle,the continued pursuit of this topic and the development of practical insights and guidancefor managers to help them deal with the complex organizational environment surroundingthese systems will become even more important.

Acknowledgements

This work was supported in part by Grant LEQSF(2002-05)-RD-A-07 from theLouisiana Board of Regents.

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