The Influence of IT Capability on Dimensions of Organization Structure

Shuli Gao1,2, Jianbin Chen1, Deying Fang1 1Business College of Beijing Union University, Beijing, China

2Institute of Technology, Tianjin University of Finance &Economics, Tianjin, China E-mail: gslok@163.com; jianbin.chen@bcbuu.edu.cn; deying.fang@bcbuu.edu.cn

Abstract: Firm’s organization structure is influenced by many factors, and relationship between IT capability and organization structure in the network environment has attracted much attention. This paper analyzes how IT capability impact on dimensions of organization structure through questionnaire. Result shows that IT capability has positive impact on horizontal differentiation, vertical differentiation, formalization and decentralization of organization structure, but the impact on spatial differentiation has not been verified.

Keywords: IT Capability; Dimensions of Organization Structure; Structural Equation Model（SEM）

I. INTRODUCTION Information technology (IT) has not only changed the

traditional ways of people to acquire information, but also broken old patterns of production management and made firm’s organization structure change profoundly in space and time. It’s been regarded as a new beginning of production revolution. Especially the emergency of the Internet in the late 20th century, many firms turn to information technology in order to decrease product or service cost, to improve management and decision making, and to enhance firm performance in a turbulent environment. However, the studies found that enormous IT investment didn’t bring about significant benefits. To overcome the issue, some academicians put forward the concept of IT capability based on resource-based view and tried to explain it from new perspective. Among these studies, the relationship between IT capability and organization structure has been a topic of interest to practitioners and academicians. Past studies argued that organization structure couldn’t match IT capability was one of important reason that IT investment couldn’t really play its valuable role. Despite significant work in this area, there is no common understanding about what organization structure is, and it has become an obstacle of further research. Many scholars study organization structure from dimension view that makes possible to construct a profile characteristics of the structure of an organization and to compare it directly with that of other organization [1]. So in the paper, we adopt this perspective to explain how IT capability impact on organization structure. To achieve our research objective, the following research question should be solved:

What is IT capability? How to measure it? How many dimensions can we separate from organization structure, and what are they? How to measure them? How IT capability influence on organization structure especially in those Chinese firms?

II. RELEVANT THEORIES AND RESEARCH HYPOTHESES

A. IT capability based on resource-based view The concept of IT capability was first proposed by

Ross et al. They specified that IT capability was the capability to apply IT to obtain sustainable competitive advantage. IT has no value apart from the processes it supports, but the underlying resources, or management assets [2]. At that time, the resource-based view (RBV) emerged in the field of information system. The RBV argued that firm was composed of a series of resources and firm’s competitive advantages relied on valuable, rare, non-imitable, and non-substitutable resources [3]. Many scholars gave different definitions of IT capability on the view of RBV. Among them, the definition gave by Bharadwaj has more influence. He argued that IT capability was the ability to mobilize and deploy IT-based resources in combination or co-present with other resources and capabilities. Adopting Grant's classification scheme for resources, IT capability are classified in the following: IT infrastructure, the human IT resources comprising the technical and managerial IT skills, and the intangible IT-enabled resources such as knowledge assets, customer orientation, and synergy [4].

Chinese scholars such as Zhang Song specified that IT capability was a repeatable conduct pattern that firm can allocate its information resources to gain the long-term competitive advantage. She categorized IT capability respectively into static, dynamic and creative level [5]. Yin Guopeng proposed a concept model that IT capability included IT technical resources, IT complementary resources and IT soft capability [6].

The definition of IT capability in this paper mainly draws from Bharadwaj’s. We measure it from IT infrastructure, IT human resources and IT intangible assets.

B. Organization structure Organization structure is the necessary condition for

firms to achieve business goals. The research about organization structure has always been a hot issue. In consideration of diversity factors that influence organization structure, academicians have studied it from different perspective. Among these studies, dimensions are regarded as important elements when investigating organization structure. Scholars have used both qualitative and quantitative methods to study these dimensions, but still have not reached any agreements about how many dimensions there are, and what they are [7-10]. Zhu Xiaowu et al reviewed the literatures and summarized thirteen dimensions that scholars concerned, from which he proposed four key dimensions: complexity, formalization, rights allocation and coordination

2009 Second International Conference on Future Information Technology and Management Engineering

978-0-7695-3880-8/09 $26.00 © 2009 IEEE

DOI 10.1109/FITME.2009.72

269

mechanism. He even gave a corresponding measurement scale[11]. Many researchers point out that dimensions of organization structure can be categorized into structural dimension and relevant dimension. The former describes the characteristics of an internal organization and differences among all organization elements, providing the basis for comparison and measurement, while the latter mainly describes environmental factors that impact and change structure dimension within organization [12].

Drawing from the notion above, the paper aims to analyze internal characteristics of organization, thus we take structural dimension for research object and study it from aspects of complexity, formalization and decentralization. In the specific analysis, the complexity is further divided into horizontal, vertical and spatial differentiations [13]. We will put forward an index system to analyze organization structure.

C. Research hypotheses 1) IT capability and complexity of organization

structure Complexity of organization structure refers to the

differences in elements of organization structure and generally includes the three differentiations mentioned above. Among them, horizontal differentiation reflects the degree of professionalism and differences in departments. Higher score means horizontal differentiation more reasonable. As a result of IT application, firms can greatly save money and time in gathering information, and staff can handle more extensive and volatile work and activate their full potential. At the same time, using IT can enhance cooperation in different departments. Therefore, complexity of organization structure is lowered. So, we propose the following hypothesis:

H1: IT capability has positive impact on horizontal differentiation of organization structure.

Vertical differentiation reflects how information is transported, integrated, coordinated among all levels of the firm. Higher score on this scale illustrates that vertical differentiation is more reasonable, and firm’s operation is healthier and more efficiency, while lower scores means organization structure is more complex and managers have to spend more time in communicating and coordinating with the staff. By using IT, information can be easily conveyed timely in all levels which help building a more smooth communication channel between headquarters and employees[14]. So information asymmetries are reduced and management costs are cut down. All these will promote firms operation more efficiency. Therefore, here is the following hypothesis:

H2: IT capability has positive impact on vertical differentiation of organization structure.

Spatial differentiation illustrates how management agencies or departments are scattered geographically. Higher score shows spatial distribution more extensive and organization structure more complicated. Due to that IT breaks old constraints of information transmission in space and time, firm is no longer subject to geographical limitations and its departments can be more discrete, at the same time, problems can still be quickly resolved by information technology. So we propose:

H3: IT capability has positive impact on spatial differentiation of organization structure.

2) IT capability and formalization of organization structure

Formalization of organization structure denotes how the processes and methods are formalized and normalized by building up operation rules and procedures. Higher score means organization structure is more formalized. Firstly, by using information technology, working processes are integrated and more standardized. Secondly, IT application requires higher staff’s education and personal quality, so firms should invest more on employee’s skill training, which in return improve their loyalty and make various norms implemented effectively. So hypothesis is following:

H4: IT capability has positive impact on formalization of organization structure.

3) IT capability and decentralization of organization structure

Decentralization reflects how the power of decision-making is dispersed to the lower levels. The higher it scores, the more that decision-making power is dispersed. Typically, application of information technology likely to yield two kinds of influence on firm’s power distribution. On the one hand, it enhances senior managers’ ability of information processing, helps them make correct decisions in a timely manner, and therefore increases the degree of power centralization. On the other hand, it also enhances the ability of staff acquiring information and handling their own jobs. If firm disperses power appropriately by allowing employees to participate in decision-making, it will promote firm’s operation efficiency and also help mobilize staff’s enthusiasm. Thanks to the combination of IT and Internet, the traditional centralized management pattern has been replaced gradually by decentralized and authorized one, and production model become more modularized, diversified, even more precise[15]. Competitively, application of IT has more impact on decentralization than centralization. Therefore, we propose the following hypothesis:

H5: IT capability has positive impact on decentralization of organization structure.

III. EMPIRICAL ANALYSES

A. Questionnaire design and data collection In this paper, we measure IT capability and dimensions

of organization structure through questionnaire that including corresponding items. Drawing from previous research in this area, we designed an initial questionnaire and conducted interviews with IT project consultants and managers in Zhongguancun Science Park. In accordance with their recommendation, we modified the questionnaire to ensure these items had meaning and relevance. Subsequently pre-investigation was carried out. The goal of this step was to further analyze reliability and validity of the questionnaire. According to the results, we eliminated items that did not contribute significantly to the value of the construct. All items were measured by Likert 5 scale. It ranged from 1 to 5 and 1 indicated completely disagree, 5 indicated completely agree. Survey was conducted in the staff who participated in certification training course of senior information management. Most of these trainees

270

came from large-scale state-owned enterprises. They have been engaged in information management at least three years and have rich experiences in practice. We sent 150 questionnaires and 133 were returned. Eliminating invalid questionnaires, 129 questionnaires were kept for analysis and an effective response rate was 86%.

B. Reliability and validity assessment The cronbach’s alpha was used to assess reliability. In

the majority of cases, the alpha equaling or exceeding 0.7 is very credible, and exceeding 0.6 is acceptable. As can be seen in Table 1, coefficients of IT capability and dimensions of organization structure mainly focus in the

range of 0.63 to 0.92, which imply that internal consistency is high.

Validity can be assessed by the degree of “agreement” among items measuring the construct, so as to differ from neighboring constructs. We adopt confirmatory factor analysis to test validity. Table 1 reflects the loading of items on their own constructs. It’s expected that the loadings of all variables within the same construct should be high on this construct. As can be seen in Table 1, these loadings are higher than 0.5 which shows a clear discriminate and convergent validity for all constructs.

TABLE 1. RELIABILITY AND VALIDITY ASSESSMENT

Variable Alpha Item Loading

IT infrastructure 0.872

IT infrastructure enhance the company relationship with manufactures from upstream and downstream 0.756 IT infrastructure improve customer relationship management 0.836 IT empowers the company productivity and services 0.741 IT expands the company investment to upstream and downstream 0.792 IT tides the merger of various management department 0.823 IT makes the company business process more fluent 0.740

IT human resources 0.806

IT managers know well about important business process 0.852 IT managers know well about company strategies 0.854 IT strategy coordinate with the whole company strategy 0.859 IT application system can fulfill the need from business departments and customers 0.629 Staff grasp all kinds of programming languages and developing tools 0.821 Staff can keep up with the step of IT development 0.827 Staff have good ability of analyzing, designing and developing software to satisfy customers 0.808 Staff do well in project development and maintenance 0.791

IT intangible assets 0.872

IT improves the ability to forecast consumer’s demand 0.830 IT helps company make better judgments of market trends 0.824 IT provides customers with better support and services 0.811 IT helps different department share resources and information 0.666 IT helps company react more quickly to market demand changes 0.805 IT helps company integrate customer information 0.745

Horizontal differentiation 0.664

Staff can realize their potential in the work 0.736 Staff have a clear understanding of the company mission and vision 0.727 Staff can get all information needed and work easier 0.583

Vertical differentiation 0.712

Managers often seek advices and views at all levels actively 0.568 Staff from all levels have channels to express their views 0.744 Managers often apply staff comments or suggestions to practice 0.822 Supervisors often appraise on staff performance 0.619

Spatial differentiation 0.632 Company departments are scattered in different places 0.644 There’s a large number of departments in the company 0.833

Formalization 0.737

Knowledge and skills contribute to my successful work 0.634 Jobs are clearly defined 0.765 Staff have awareness of relationship between their work position and other’s 0.749 Staff know clearly about their direction of career development 0.681 Staff understand their specific job responsibility 0.656

Decentralization 0.757 Supervisor let me take part in decision-making affairs related to my work 0.835 Supervisor let me take part in decision-making affairs related to company development 0.824 Managers at all levels work together to achieve business goals 0.810

C. Structure equation model and hypotheses testing As discussed above, the measurement items were put

through validity and reliability assessment. We proceeded a full structural equation model to validate the mentioned hypotheses. In the model, IT capability is exogenous variable and dimensions of organization structure are endogenous variables. IT capability as a second-order factor is determined by three first-order factors, including IT infrastructure, IT human resources, and IT intangible assets. The output of SEM is shown in Figure 1.

Kit-Tai Hau et al pointed out that evaluation of model fit index was a complex subject. Generally, RMSEA

smaller than 0.08 and NNFI,CFI greater than 0.9 indicated that the model was a “good” model. But Sieiger(1990) argued that RMSEA was influenced by the number of cases. He believed that RMSEA less than 0.1was acceptable[16-17].Our model fit index shows that Chi-square is 518.5, degree of freedom is 165, RMSEA is 0.085, CFI is 0.912, NNFI is 0.903. Through judging fit index, we believe that the model is acceptable.

As model’s path coefficient can reflect the extent of impact between latent variables, we list the test result in Table 2(significance level is 0.05).

271

Figure 1. Structure equation model

TABLE 2. PATH-COEFFICIENTS

Hypothesis Path-coefficient T-value P-value Output

H1 IT Capability→Horizontal differentiation 0.43 3.48 <0.05 pass

H2 IT Capability→Vertical differentiation 0.55 4.65 <0.05 pass

H3 IT Capability→Spatial differentiation 0.03 0.44 >0.1 not pass

H4 IT Capability→Formalization 0.33 2.98 <0.05 pass

H5 IT Capability→Decentralization 0.52 4.99 <0.05 pass

As shown in Table 2, the path coefficient between IT

capability and horizontal differentiation is 0.31 (P<0.05). The result provides evidence that IT capability has positive impact on horizontal differentiation, therefore H1 is acceptable. In the same way, we can conclude that IT capability also has positive effect on vertical differentiation, formalization, and decentralization, namely hypothesis H2, H3, H5 are all acceptable. But the path coefficient between IT capability and spatial differentiation is 0.03, T value is only 0.44 (P>0.1), so assumption that IT capability has positive impact on spatial differentiation hasn’t been confirmed. Note that if P value exceeds the scope of chosen significance level, it only indicates that relationship between variables is not significant but needs further research.

IV. DISCUSSION AND CONCLUSION In this paper, we empirically studied how and to what

degree IT capability impacted on dimensions of

organization structure. Result shows that this kind of impact is positive and direct, leaving impact on spatial differentiation for further research. It paves a path for firms to improve organization structure, and furthermore to improve its performance. And the path is to improve IT capability. With improvement of IT capability, firms should solidify and adjust organization structure in terms of its characteristics to match IT capability.

Although hypothesis that IT capability has positive impact on spatial differentiation has not been confirmed yet, we still have no sufficient evidence to deny it. Maybe to expand the sample size or to modify questionnaire would bring us a new result.

We acknowledge that there are some limitations in this study. For example, while we mainly focused on internal characteristics of the organization structure, the impact of external environmental factor, namely relevant dimensions, was not taken into consideration. This may limits the scope of factors considered in the paper.

IT_infra

IT_hum

IT_intan

IT Capability

0.26

0.50

0.29

0.86

0.71

0.84

0.43

0.55

0.03

0.52

Hori_1

Horizontal

Vertical

Spatial

Decentralization

Hori_2

Hori_3

Vert_1

Vert_2

Vert_3

Vert_4

Spat_1

Spat_2

Form_1

Form_2

Form_3

Form_4

Form_5

Dece_1

Dece_2

Dece_3

0.411

0.27

0.48

0.47

0.46

0.28

0.42

0.74

0.95

0.52

0.45

0.33

0.39

0.46

0.35

0.43

0.41

0.67

0.61 0.57

0.70

0.85

0.62

0.53

0.32 0.22

0.76 0.75 0.64 0.58

0.80 0.76 0.77

Formalization

0.33 0.56

272

Besides, the relationship between IT capability and organization structure is complex and it takes time for IT investment converted into IT capability, we should carry out continuous and more comprehensive investigation on these firms in the future, especially on their interactive mechanism.

REFERENCES [1] D.S.Pugh, D.J.Hickson, C.R.Hinings andC.Turne, “Dimensions of

organization structure,” Administrative Science Quarterly, 1968,vol(1),pp.65-105

[2] J.W.Ross, C.M.Beach and D.L.Goodhue, “Develop long-term competitiveness through information technology assets,” Sloan Management Review. 1996,vol38(1),pp.31-34,

[3] B.Wernerfelt , “ A resource- based view of the firm,” Strategic Management Journal, 1984,vol5 (2),pp.171 – 180

[4] A.S.Bharadwaj, “A resource-based perspective on information technology capability and firm performance: An empirical investigation,” MIS Quarterly, 2000,vol24(1),pp.169-196

[5] Zhang Song, “Information execution-IT Capability of contemporary enterprises based on Resource-based View,” Economy& Management Publish House, 2006

[6] Yin Guopeng and Chen Yu, “Theoretical and empirical research of IT Capability: Resource-based View,” Naikai Business Review,2007,vol10,pp.26-31

[7] M.Harris andA. Raviv, “Organization design,” Management Science,2002,vol48(7),pp.852-865

[8] B.C.Reimann, “Dimensions of structure in effective organization: Some empirical evidence,”The Academy of Management Journal,1974,vol17(4),pp.693-708

[9] D.S.Pugh, D.J.Hickson and C.Hinings, “The context of organization structure,”Administrative Science Quarterly, 1969,vol14,pp.91-114

[10] X.Lin and G.Richard, “Organizational structure, context, customer orientation, and performance: Lessons from Chinese stated-owned enterprises,” Strategic Management Journal, 2003,vol24(11),pp.1131-1151

[11] Zhu Xiaowu and Yan Yan, “Review on theory and method of dimensions of organization structure” Foreign Economics & Management，2008,vol11,pp.57-65

[12] R.L.Daft, “Organization theory and design,” Cincinnati, Ohio: South-Western College Publishing, 1998

[13] Shi Lei, “The Review on relationship between technology and organization,” Foreign Economics & Management, 2007,vol9,pp.1-9

[14] Liu Yu and Liu Shilan, “The Review on the Effects of Information Technology on Organizational Change of Enterprise,” Science of Science and Management of S.&T.,2007,vol11,pp.153-157

[15] Gao Jing, Guan Tao and Wang Yalin, “Research on the Information Application and the Organizational Structure Transform Interaction,” Science of Science and Management of S.&T.,2007,vol10,pp.41-46

[16] Kai-Tai Hau,Zhonglin Wen and Zijuan Cheng, “Structural equation model and its applications,” Educational Science Publishing House,2004

[17] Xiao-Ping Chen,Anne Tsui, and Jing-Lih Farh, “Empirical methods in organization and management research,” Peking University Press,2008

273