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 / Autumn 2008 / Issue 52(originally published by Booz & Company)


Recent Research


How Your Competitor’s Troubles May Hurt You

Title: Misery Loves Company: The Spread of Negative Impacts Resulting from an Organizational Crisis
Authors: Tieying Yu, Metin Sengul, and Richard H. Lester
Publisher: Academy of Management Review, Vol. 33, No. 2
Date Published: April 2008

Arthur Andersen. ValuJet. Union Carbide. What do these companies bring to mind? All faced crises that sent shockwaves through their respective industries. By examining these and a number of other historical examples, the authors of this paper aimed to find out how a crisis in one organization might spill over into others in its industry.

They found that the greater the uncertainty created in an industry by an individual company’s crisis, the likelier other companies in that industry were to be negatively affected. For example, when Air France’s Concorde crashed in 2000, killing all passengers and crew, as well as several people on the ground, British Airways was forced to immediately ground its Concordes as well. Some industries, such as those that rely on risky and complex technology systems or that are susceptible to environmental disasters, are inherently crisis-prone. However, a company with a relatively simple organizational structure and a good reputation is less likely to be affected by crisis spillover than is a company with a complex structure and a poor image.

Another factor in determin­ing spillover is the role of external players — the press, regulatory bodies, academics, and analysts. A negative article in the local paper or a poor forecast from an equity analyst about an individual company can affect the reputation of the entire industry. The authors offer a strat­egy they call “preferential detachment,” which includes efforts to distance an organization from stricken companies in its industry to limit risk.

Bottom Line: When a company is in trouble, other organizations in the industry can protect themselves by building confidence internally among stakeholders and externally among media and analysts. It may also help to undertake a restructuring or change initiative that could help them avoid the fate of the troubled firm.


How Much Should IT Cost?

Title: Determinants and Consequences of Firm Information Technology Budgets
Authors: Kevin Kobelsky, Vernon Richardson, Rodney Smith, and Robert Zmud
Publisher: University of Arkansas Sam M. Walton College of Business Information Technology Research Institute, Working Paper No. ITRI-WP097; Accounting Review, forthcoming
Date Published: January 2008

Is information technology investment a good predictor of a com-pany’s future success? And if so, how much should organizations invest in their underlying IT infrastructure, and when? Those were just two of the questions this study examined by reviewing data from the InformationWeek 500, a group of companies with track records of spending heavily on information technology.

The authors show that there is a positive link between IT spending and a firm’s future profitability. But determining what to target in the IT budget is the critical factor. According to the authors, chief information officers should ignore industry averages when setting their IT budgets, and instead focus on IT that helps them automate costly business processes or better capture and analyze reporting of the firm’s activities and performance. Al-though optimal levels of IT spending will vary greatly on the basis of environmental, technological, and organizational factors, according to the research, any increase in a firm’s IT budget, irrespective of how the funds are allocated, will increase its shareholder returns. For instance, increasing a firm’s IT budget 1 percent will boost its shareholder returns, on average, by 1.17 percent each year for the three years after the investment is made. 

Bottom Line: Incremental, strategic investments in information technology produce consistent, long-term positive returns.

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