The Strategic Value of IT in Setting Productive Capacity

Information Systems Research, 30(4), 1124-1144, December 2019

Posted: 27 May 2020

See all articles by Dawei (David) Zhang

Dawei (David) Zhang

Lehigh University

Barrie R. Nault

University of Calgary - Haskayne School of Business

Xueqi (David) Wei

University of Calgary - Haskayne School of Business

Date Written: March 4, 2019

Abstract

Capacity is the maximum short run output with capital in place under normal operations, and capital investment increases capacity. Excess capacity can be used as an economic strategy for entry deterrence by lowering average costs over a greater range of output, and as an operations strategy providing value through flexibility to manage demand fluctuations and production disturbances. Our primary focus is to study the way that information technology (IT) can contribute to a strategy of holding excess capacity by comparing the relationship between IT capital and capacity with that of non-IT capital and capacity. Using production theory-based empirical analyses, we find that increases in IT capital yield almost four-fold greater expansion in capacity than do increases in non-IT capital. Thus, as both types of capital are constraints on capacity, for a strategy of holding excess capacity IT capital is a more valuable constraint to relax than non-IT capital. In addition, since the late 1990s, IT capital, and to a lesser extent non-IT capital, have reduced capacity utilization (output/capacity), meaning increasing levels of excess capacity are being held across manufacturing industries and utilities across the economy.

Keywords: Capacity, Capacity Utilization, Information Technology, Production Function

Suggested Citation

Zhang, Dawei (David) and Nault, Barrie R. and Wei, Xueqi (David), The Strategic Value of IT in Setting Productive Capacity (March 4, 2019). Information Systems Research, 30(4), 1124-1144, December 2019, Available at SSRN: https://ssrn.com/abstract=3578091

Dawei (David) Zhang

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

Barrie R. Nault (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

HOME PAGE: http://ucalgary.ca/bnault

Xueqi (David) Wei

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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