An Empirical Study of the Relationships Between IT Infrastructure Flexibility, Mass Customization, and Business Performance
Sock Hwa Chung
412 Owen Building
Department of Computer Information Systems
College of Business
Eastern MichiganUniversity
Ypsilanti, MI 48107
Phone: (734) 487-1215
Fax: (734) 487-1941
E-Mail:
Abstract
Information technology (IT) infrastructure deserves serious attention from both the practitioner and academic communities, especially concerning the factors for IT infrastructure flexibility. The issue of flexibility is viewed as a critical aspect of IT infrastructure, because organizations are faced with an ever-increasing rate of change in their business environments. One effort most business sectors have made to prepare for this change is the trend toward mass customization. Recently, many organizations have embraced mass customization in an attempt to provide unique value to their customers in a cost-efficient manner.
The purpose of this study is to empirically investigate a sequential relationship between IT infrastructure flexibility, mass customization, and business performance. The process involves an investigation of the critical factors for IT infrastructure flexibility, along with the firm's mass customization and business performance indicators. The findings of this study provide evidence that integration and modularity of an organization's IT infrastructure facilitate the organization's effort to accommodate mass customization. Additionally, the flexibility of the IT personnel, the human component of IT infrastructure, and mass customization directly affect the organization's business performance.
ACM Categories:H.1.1, H.4.0
Key Words:IT Compatibility, IT Connectivity, IT Infrastructure Flexibility, IT Personnel Skills, IT Modularity, Mass Customization, Business Performance
Introduction
The capabilities of unique structural information technology (IT) can provide companies with tangible benefits and a continuity of business practices (Kettinger et al., 1994). Kettinger and his colleagues (1994) suggested that one of these defining structural capabilities is the technological infrastructure. The components of an organizational IT infrastructure include networks, databases, and applications (Duncan, 1995), and skills and capabilities of IT personnel (Byrd & Turner, 2000; Weill & Broadbent, 1998). According to Byrd and Turner (2000), an IT infrastructure is defined as follows:
The shared IT resources of a technical component of hardware, software, communication technologies, data, and core applications and a human component of skills and competencies that provide a unique technological foundation (1) for widespread communications interchanges across an organization and (2) for the design, development, implementation, and maintenance of present and future business applications.
McKay and Brockway (1989) suggested that an IT infrastructure is the enabling foundation of shared IT capabilities upon which the entire business depends. The value of IT infrastructure is well recognized among business organizations. As an example, Broadbent and Weill (1997) noted that IT infrastructure expenditures account for an average of over 58 percent of organizational IT budgets, and they further stated that the percentage has grown at about 11 percent per year in recent years.
Researchers and practitioners have taken note of the potential value of an organization's IT infrastructure. One way that this potential has been manifested is through the development of a flexible and responsive IT infrastructure by major organizations to accommodate a rapidly changing business environment. For example, Johnson & Johnson began to face new business pressures in the early 1990 when large customers, such as Wal-Mart and KMart, created new demands. Johnson & Johnson’s business and IT managers acted in partnership to develop a new set of infrastructure capabilities while balancing costs, synergies and the need for flexibility (Weill & Broadbent, 1998). Historically, IT solutions for business requirements have been built on components of the IT infrastructure. Duncan (1995, p. 38) noted, "one firm's infrastructure may make strategic innovations in business processes feasible, while the characteristics of competitor's infrastructure may likewise cause their inability to imitate the innovation rapidly enough to mitigate the first mover's advantage." Duncan also noted that this difference may be a result of the disparity between the flexibility of the IT infrastructure of the two firms. An organization's flexible IT infrastructure can be one of the major barriers to imitation by its competitors. Davenport and Linder (1994) suggested that a good IT infrastructure is quantified by its flexibility and robustness to enable change. The issue of flexibility is viewed as a critical component of IT infrastructure, because many business organizations are faced with an ever-increasing rate of change in their competitive environments (Byrd &Turner, 2000).
One of the most profound changes in business environments has been the growing demand for customized products and services by consumers and businesses. In response to this demand, businesses are rapidly altering their business processes to support mass customization. Pine, Peppers, and Rogers (1995,p.105) said mass customization “calls for a customer-centered orientation in production and delivery processes requiring the company to collaborate with individual customers to design each one’s desired product or service, which is then constructed from a base of pre-engineered modules that can be assembled in a myriad of ways.” Mass customization requires a dynamic network of relatively autonomous operating units. The key to the process is that different operating units or modules do not come together in the same sequence every time a product or a service is delivered (Pine, Victor, & Boynton, 1993). Each customer’s wants and needs dictate the combination of how and when the modules interact to make the desired product or provide the preferred service. Therefore, mass customization allows businesses to offer products and services to a wide variety of customers and to meet product demands through service or product variety and innovation – all without an increase in costs (Boynton, Victor, & Pine, 1993; Zipkin, 2001).
Many organizations have embraced mass customization in an attempt to provide unique value to their customers in a cost-efficient manner. The following examples demonstrate mass customization in two different industries. First, Harley-Davidson, a well-known manufacturer of motorcycles, has a multimedia prototype tool that can help customers customize their own Harley motorcycle. Using a touch screen, they can view product possibilities such as color or product variation and select genuine Harley accessories to customize their motorcycle (Teresko, 1994). Second, women's swimsuits appear to be an ideal product for mass customization. Mama Pavola introduced a convertible maternity swimsuit line. After the baby comes, the maternity suit may be sent back to the company together with post-partum measurements. The company modifies the suit within 10 days to custom fit a post-maternity figure (Family Circle, 1995).
Several writers have linked IT flexibility with mass customization (e.g., Boynton, Victor, & Pine 1993; Kahn, 1998; Pine 1996). For example, Pine (1996) reported that it takes a highly integrated and flexible IT infrastructure to support mass customization. He included the following among the IT infrastructure design tools: flexible switches and networks, common customer views with shared databases, computer integrated manufacturing, and workflow management and coordination software. For mass customization to succeed in a company, Kahn (1998) claimed that organizations needed more flexible databases, flexible networks, and flexible CAD/CAM systems in their IT infrastructure. However, to date, these notions have not been empirically tested in the IT research literature in large-scale studies.
The purpose of this study is to empirically examine the relationships between a firm's IT infrastructure flexibility, mass customization, and the firm's business performance. A properly functioning flexible IT infrastructure could help a firm accommodate mass customization in a competitive environment, and ultimately improve business performance. This paper presents the findings of a large-scale empirical study of the relationships between IT infrastructure flexibility, mass customization, and business performance to provide empirical evidence on the relationships between these important variables.
Theoretical Framework
IT-supported mass customization has received extensive attention from most industry sectors. Gilmore and Pine (1997) stated that companies throughout the world have embraced mass customization in an attempt to provide unique value to their customers. Pine (1993) suggested that technological innovation plays a vital role in the implementation of mass customization. Mass customization requires an integrated organization in which every function, unit, and person are focused on the individual customer (Pine, 1993).
There is evidence that a flexible and responsive IT infrastructure within a firm will facilitate the firm's requirements for mass customization, and ultimately business performance. Two illustrative cases of how a flexible IT infrastructure enables and supports mass customization are discussed below.
Dell Computer Corporation has made profitable use of a flexible IT infrastructure in supporting mass customization. The flexible infrastructure at Dell enables coordination across company boundaries to achieve new levels of efficiency and productivity (Magretta, 1998). Dell’s flexible infrastructure also allows for just-in-time deliveries from a host of suppliers, a highly adaptive manufacturing facility, and the establishment of close relationships with customers. Kelley et al. (1983) suggested that a relationship is close where a high degree of interdependence is present as indicated by frequent contact, strong impact at each contact, diverse kinds of activities, and long duration of contact. For example, Dell's manufacturing facility makes the production of hundreds of different computer combinations possible at lower costs than many of its major competitors. Dell's IT infrastructure allows its close customers to access internal support information online in the same way as its technical support personnel do, resulting in significant savings in time and money for both sides. The same customers also have access to their own purchasing and technical information about the specific computer configurations they purchase from Dell through customized intranet sites that are components in Dell’s overall IT infrastructure (Magretta, 1998).
Boynton, Victor and Pine (1993) described how Westpac, a South Pacific financial services conglomerate that had previously dominated banking in its marketplace, moved to more flexible technologies to institute a new strategy of product differentiation. Westpac decided to overhaul its entire IT infrastructure and created a completely new systems development and operational environment. In addition, Westpac's integration technology was flexible enough to accommodate all of its communications needs as well as modular enough to develop new systems by combining software components.
The new IT infrastructure environment was constructed to allow Westpac to consolidate its understanding of the processes and expertise required to create new financial products into a set of highly flexible software modules. The result was a robust and advanced software engineering approach that could combine different bits of knowledge quickly and at a low cost, in response to changing product and service demands (Boynton, Victor & Pine, 1993). While offering a customized portfolio of financial products and services to its individual customers, Westpac is now able to fight off niche competitors that might have eroded its market share. These two mass customizers, Dell Computer Company and Westpac, use highly flexible IT infrastructures to shorten the time from customer order to customer delivery in a way that would be almost impossible otherwise.
IT infrastructure characteristics can be divided into two related, but distinct components: a technical IT infrastructure and a human IT infrastructure (Broadbent & Weill, 1997; Broadbent, Weill, O’Brien & Neo, 1996; Byrd & Turner, 2000). Byrd and Turner (2000) showed that the technical component of IT infrastructure flexibility consists of two distinct factors, integration and modularity. They further illustrated that integration consists of two sub-factors, IT connectivity and IT compatibility. Connectivity is the ability of any technology component to attach to any of the other components inside and outside the organizational environment (Duncan, 1995). Compatibility is the ability to share any type of information across any technology component. At one extreme, only simple text messages can be shared, while at the other extreme, any document, process, service, video, image, text, audio, or a combination of these can be used by any other system, regardless of manufacturer, make, or type (Duncan, 1995). Modularity is the ability to add, modify, and remove any software, hardware, or data components of information technologies with ease and with no major overall effect (Byrd & Turner, 2000). Modularity also relates to the degree to which IT software, hardware, and data can be either seamlessly or effortlessly diffused into the infrastructure or easily supported by the infrastructure.
As mentioned, connectivity and compatibility were shown through past studies to be sub-factors of integration. Therefore, integration is a combination of the two. Some writers have noted that integration is critical to mass customization (Vokurka & McCaskey (2001). The reason is the central role that information plays in mass customization. Mass customization entails rich information flows in all parts of a corporation’s value chain from the customer through the various departments of the corporation itself and out to its suppliers. The more information a corporation is able to gather about its customer and to disseminate that information along its value chain, the better able it is to offer customized products and services to the customer. Inside the firm, the corporate functions need to be seamlessly integrated with a free flow of information. Additionally, a company needs to have an uninhibited flow of information with as many of its suppliers as possible to facilitate mass customization. Both seem to be critical so that just in time processes that are key to mass customization are possible.
Information, of course, is the primary output of IT. IT that is integrated across a firm’s value chain can provide the information necessary to provide customized products and services for its customers. Integrated IT is probably the best way to provide seamless information links – one of the keys to mass customization – throughout an organization (Pine, Victor, and Boynton, 1993). From these arguments, an integrated IT infrastructure appears to be essential to coordinating customer databases, ordering, billing, and communications exchanges among corporate departments and, ultimately, supporting mass customization in an organization. Therefore, the first hypothesis is offered.
Hypothesis 1: IT infrastructure integration has a positive effect on mass customization.
There is also evidence that integrated IT infrastructures add value in other ways and may affect firm performance of organizations more directly (Davenport & Linder, 1994; Kettinger et al., 1994). The integration of IT in most organizations can bring high economies of scale across many functions and processes. This integration can also reduce redundant and unused or under-utilized capacity. Firms that are using integrated IT report improvements in both time-based and range-based flexibility, enhancements in processing and procedural efficiencies, andprogress in integrating the firm’s operations (Lei et al., 1996). Small (1999) showed that integrated IT improved 12 of 15 organizational processes such as product quality, scrap and rework, setup times, labor costs, and delivery lead-times in a manufacturing environment. The improvement of so many processes from integrated IT should lead to better overall organizational performance. Therefore, one could hypothesize that a direct relationship could easily exist between integrated IT infrastructure and firm performance.
One caveat is in order here, however. Barua, Kriebel, and Mukhopadhyay (1995) noted that IT resources at the earliest stages of IT investment like IT infrastructure might be too far removed from firm performance to have a direct effect. They argued that IT might affect other intermediate variables such as capacity utilization and inventory turnover and that these intermediate variables might in turn affect business performance. Although they found a significant relationship between IT and several intermediate variables, they did not find relationships between these intermediate variables and business performance for the most part. Therefore, even though there is some evidence to indicate that IT infrastructure integration might have a direct effect on firm performance, it is in no way assured that this is the case. Nevertheless, with the evidence leaning toward a relationship, the following hypothesis is offered:
Hypothesis 2: IT infrastructure integration has a positive effect on business performance.
Modularity is one concept that has not received much attention in the IT research literature (Duncan, 1995). Schilling (2000) suggested that modularity follows a continuum describing the degree to which a system's components can be separated and recombined. Almost all systems are, to some degree, modular. Products, like other kinds of systems, are comprised of bundles of components (Schilling, 2000). For example, a personal computer is a bundle of a CPU, a monitor, a keyboard, and a number of other components, many of which can be bought separately and assembled by the user. Also, many software applications embed the concept of modularity in their systems in order to satisfy the business requirements of their organizations. According to Duncan (1995), modularity is the standardization of business operations for shareability and reusability (e.g., structured programming, modularization of routine systems) within the firm.
A number of observers have suggested that modularity in areas such as technology and product design is a key to successful low cost mass customization. For example, Pine (1993) stated that modularity should be a centerpiece of mass customization although he failed to say how or where modularity might be utilized. Changes in product or service characteristics during production runs or service developments are likely to require software program modules to be changed also. The ability to quickly add, modify, or delete programs to an IT infrastructure seems to be a necessity for fast changes in manufacturing or service setups, for quickly designing and delivering new products and services, and for rapidly changing the sequencing of products and services through the production process. In many mass customization processes, design, fabrication, and assembly follow in very rapid succession that, in many cases, may dictate the rapid mixing and matching of software program modules to control and support different customized products or services. The next hypothesis follows from this argument:
Hypothesis 3: IT infrastructure modularity has a positive effect on mass customization.
IT infrastructure modularity might also affect business performance directly. Researchers such as Meredith (1986), and Hayes and Jaikumar (1988) have suggested that the potential benefits of new technologies are often negated by a mismatch between new technologies and applications and the existing infrastructures. Although their definition of infrastructure is broader than the one used in this paper, the same principle may apply. The problem as they saw it and the cause for the mismatch was the difficulty in changing the infrastructure when new competitive challenges arose and new IT applications, policies, procedures, and organizational structures were implemented to meet those challenges. IT infrastructures with high modularity would be better able to accommodate these organizational changes because of their ability to add, modify, and delete modules quickly and with minimum effort. This ability would decrease the possibility of a mismatch of the IT infrastructure and other organizational changes that are necessary to meet new competitive challenges in the marketplace. The alignment of IT and business capabilities have been shown to be a strong indicator of business performance (Chan et al., 1997).