Firm Strategy and the Internet in American Commercial Banking

Abstract

As information technology (IT) becomes more accessible, sustaining any competitive advantage from it becomes challenging. This has caused some critics to dismiss IT as a less valuable resource. We argue that, in addition to being able to generate strategic advantage, IT should also be viewed as a strategic necessity that prevents competitive disadvantage in rapidly changing business environments. We test a set of hypotheses on strategic advantage and strategic necessity in the context of Internet banking investments among the entire population of the United States Federal Deposit Insurance Corporation (FDIC) banks from 2003 to 2005. We seek to understand whether their IT investments were made as a strategic choice, or as a result of strategic necessity. Our econometric analysis suggests that IT investments: (1) were made to complement firm strategy for strategic advantage, as well as due to strategic necessity; and (2) paid off by enhancing firm performance and addressing the issue of strategic necessity in an effective way. In addition, our analysis revealed a simultaneous relationship between performance and IT investments, so that high-performing banking firms appear to have been more likely to invest in IT.

Keywords: Banking, econometrics, Internet banking, simultaneity, strategy, transaction costs