Performance Effects of Information Technology Synergies in Multibusiness Firms

1. Performance Effects of Information Technology Synergies in Multibusiness Firms Farah Kabbani Published March 2006

2. Introduction • Describes sources of Information Technology synergy & the conditions under which IT synergies improve the corporate performance of multibusiness firms. • IT: strategic organizational resource • US corporations allocate more than 50% of their capital investment and 4.2% of annual revenues to IT

3. The challenge is in business units operating in different industry segments as they have different competitive principles. • Seeking autonomy from the center • Lack of coordination  duplications • IT is applicable across many industries so duplications are avoidable

4. Cross-unit synergies arise from: • Shared tangible resources • Coordinated strategies • Pooled negotiating power • Shared know-how • Vertical integration • Combined new business creation

5. Shared tangible resources • Multibusiness firms should use common hardware, software and communications technologies, as they are applicable across almost all industries. • This is done by setting common policies and standards for hardware, software and communications technology.

6. Coordinated strategies • Coordinated strategies refer to the coordination of the IT strategies of business units. • They create synergy because they enable a firm to take joint actions and minimize competition among its business units.

7. Pooled negotiating power • Pooled negotiating power is obtained when the IT vendor relations of the business units are coordinated. • Uncoordinated IT vendor relations across business units leads to redundancy. • This leads to the firm overspending instead of lowering their costs.

8. Shared know-how • Shared know-how refers to the use of common IT skills and knowledge across business units. • IT skills are applicable across a broad range of functional areas and industries.

9. Diversification Level of a Firm • The extent to which a firm operates in distinct business segments (industries) simultaneously. • Increasing diversification level increases the number of business segments in which the firm operates. • It also limits the firm’s ability to coordinate IT resources across those businesses.

10. Results

11. Conclusion • This study argued that a multibusiness firm has an opportunity to exploit cross-unit IT synergies by applying its IT resources and IT management practices across multiple businesses. • The study also proved that the level of diversification of the firm limits the firm’s ability to coordinate IT resources, thus weakening performance.