The Strategic Value of Information Technology in Setting Productive Capacity

Dawei (David) Zhang (), Barrie R. Nault () and Xueqi (David) Wei ()
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Dawei (David) Zhang: Department of Decision and Technology Analytics, College of Business, Lehigh University, Bethlehem, Pennsylvania 18015
Barrie R. Nault: Haskayne School of Business, University of Calgary, Calgary, Alberta T2N 1N4, Canada
Xueqi (David) Wei: School of Management, Fudan University, Shanghai 200433, China

Information Systems Research, 2019, vol. 30, issue 4, 1124-1144

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 by 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 fourfold 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, has 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 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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