Impact of IT Investment on Profit
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Impact of IT Investment on Profit

The new study explores that the investment that companies make in the facts of the era of profitability growth is greater than the investment in advertising and marketing or R&D. TopicsCompeting With Data &Analytics

How do records inform business procedures, offers and engagement with clients? This research looks at developments in the use of analytics, the evolution of analytical approaches, the composition of the most profitable teams, and new possibilities for information-driven innovation. More in this seriesReady members?

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CEOs often struggle with several important choices as they allocate their group's discretionary greenback among different investment classes. Should they invest more in IT than, say, advertising or research and development? And once they have spent money on IT, what types of projects should they be aware of?

A recent study we conducted offered some insight into such questions. Although several previous studies by different investigators now did not detect a substantial effect of IT investment on profitability, we found that the latest additional record technology – which used the 1995 view – had a broadly favorable impact on profitability. Our study used data from more than four hundred companies worldwide from 1998 to 2003. (A more distinctive note about our study can be found in the editorial in the March 2012 MIS Quarterly difficulty.)

What's more, we found something quite unexpected: Investments in IT had more of an effect on a company's revenue than similar spending on advertising or R&D. We also determined, however, that there has been drastic variability in the returns on IT investments than in investments in advertising and marketing or R&D. Perhaps because IT involves new technologies, IT investments provide greater room for creativity and innovation. It may be that most organizations already know how to manage advertising and R&D to their high-quality advantage, but few are good at tackling IT.

We also find that some types of IT tasks seem to enhance profitability more than others. The information age can be used to improve performance and reduce costs, or it can be used to help increase sales through, say, customer enjoyment and customer retention strategies. We observe that broadly, IT investments are more powerful in increasing profitability by increasing revenue than by reducing running costs. In fact, IT investment has a markedly positive effect on sales growth; for example, the $ 1 increase in IT costs is in line with the associated workforce in our observations with the $ 12.22 revenue growth in line with the employees. However, the impact of rising IT prices on universal running cost reductions is negligible in our sample of firms. Related research

S. Mithas, AR Tafti, I. Bardhan and JM Goh, “Information Technology and Corporate Profitability: Mechanisms and Empirical Evidence,” Quarterly MIS 36, no. 1 (March 2012): 205-224.

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How does data inform business approach, offering, and engagement with customers? This research emerges on trends in the use of analytics, the evolution of analytical methods, the composition of the most efficient crews, and new possibilities for record-driven innovation. More about this series About the author

Sunil Mithas is an associate professor in the Robert H. Smith School of Business at the University of Maryland at College Park and author of the ebook Digital Intelligence: What Every Smart Manager Must Have for Success in an Information Age. Ali Tafti is an assistant professor of business management at the University of Illinois at Urbana-Champaign. Indranil Bardhan is a professor of statistical management structures at the Jindal School of Management at the University of Texas at Dallas. Jie Mein Goh is an assistant professor of statistical systems at the IE Business School in Madrid.

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