Information Technology and Diversification: How Their Relationship Affects Firm Performance

Information technology (IT) makes its fullest impact on organizations when it is deployed in conjunction with changes in business processes, structures, and strategies. While the importance of IT coupled with organizational changes for business performance has been widely discussed in the information systems (IS) literature, there has been little empirical research on the issue. Using information week´s annual data set of IS budgets and the Compustat database, this research examines empirically the relationship between IT and diversification by employing multiple diversification measures. It also examines empirically the relative impact on performance of IT and diversification. Results show that diversification coupled with increased IT spending improves firm performance when its strategic emphasis is on related diversification. The results also show that firms place strategic focus on related diversification when they increase IT spending, and that they require more IT when their strategic emphasis is tilted toward related diversification. The findings imply that by providing a better means of coordination, IT enables scope economies, efficient utilization of business resources and collaboration across individual business units, eventually leveraging the benefits of diversification