The International Journal of Logistics Management

The impacts of IT capability on internet-enabled supply and demand process

integration, and firm performance in manufacturing and services
Hefu Liu Qian Huang Shaobo Wei Liqiang Huang
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IJLM
26,1
172
Received 15 November 2013
Revised 24 February 2014
Accepted 25 February 2014
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The International Journal of
Logistics Management
Vol. 26 No. 1, 2015
pp. 172-194
Emerald Group Publishing Limited
0957-4093
DOI 10.1108/IJLM-11-2013-0132
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0957-4093.htm
The impacts of IT capability on
internet-enabled supply and
demand process integration,
and firm performance in
manufacturing and services
Hefu Liu, Qian Huang and Shaobo Wei
School of Management, University of Science and Technology of China,
Hefei, China, and
Liqiang Huang
Zhejiang University, Hefei, China
Abstract
Purpose The purpose of this paper is to derive a model to examine how Information Technology (IT)
capability affects internet-enabled supply and demand process integration, which will eventually
improve firm performance. In addition, the moderating effects of industry type in the research framework
are explored.
Design/methodology/approach Data were obtained from a survey administered to 261 firms in
the manufacturing and services industry in China. The structural equation modeling approach is used
to test the hypotheses. The study further applied the t-test to compare the path coefficiencies between
manufacturing and service.
Findings Results from the survey indicate that internet-enabled supply and demand process
integration is affected by IT capability, and can directly impact firm performance. The results further
indicate that manufacturing and services firms may benefit from IT capability in different ways.
Originality/value The current paper contributes knowledge on the value-realizing mechanism of
internet-enabled supply chain integration (SCI) from a resource-based view. It presents a multidimensional
explanation of the relationships among IT capability, internet-enabled SCI, and firm performance.
Keywords IT capability, Higher-order organizational capability,
Internet-enabled supply chain integration, IT operational capability, IT transformational capability
Paper type Research paper
1. Introduction
Due to globalization and the diffusion of internet applications, integrating supply chain
processes over the internet is becoming a main theme of supply chain management
(SCM) (Flynn et al., 2010; Liu et al., 2013a; Ralston et al., 2013; Rosenzweig, 2009). It is
suggested that the internet could provide an open, real-time, global platform for a firm
to access to a wide range of channel partners (anytime, anyplace, anyone, almost) at a
lower cost (Gimnez and Loureno, 2008; Ke et al., 2009; Zhu et al., 2006). Supply chain
integration (SCI) in e-business thus could enable the firm to overcome the tradeoffs of
low-cost, rich-content, real-time, and broad channel deployment, and eventually to derive
The work described in this paper was fully/partially supported by the grants from the National
Natural Science Foundation of China (NSFC: 71101136, 71201150, 71090401/71090400, and
71332001) and the Research Grants Council of the Hong Kong Special Administrative Region,
China (Project No. CityU 195413 and N_CityU115/10).
 competitive advantage that the firm cannot achieve individually (Gimnez and Loureno, The impacts
2008; Lee and Whang, 2004; Liu et al., 2010; Rosenzweig, 2009). In this view, researchers of IT
and practitioners have held a view that a greater level of integration in e-business would
lead to better firm performance (Frohlich and Westbrook, 2001; Rosenzweig, 2009).
capability
However, although the benefits of SCI have been well touted theoretically (Frohlich, 2002;
Lee and Whang, 2004; Rosenzweig, 2009), few studies have investigated the antecedents
of SCI in e-business. 173
In the existing literature, Information Technology (IT) is often mentioned as a key driver
for successful SCM implementation (Bagchi and Skjoett-Larsen, 2003; Hall et al., 2012;
Li et al., 2009). The literature indicates that most successful collaborative relationships are
developed when firms and their partners both equip with IT capability (Liu et al., 2013b;
Rai et al., 2012). IT capability reflects a firms ability to assemble, integrate, and deploy IT
resources to meet business needs (Kim and Lee, 2010; Ravichandran and Lertwongsatiem,
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2005; Ray et al., 2005). This ability enables the firm to diffuse IT applications in business
processes efficiently, as well as to extensively use IT to support the execution of
business strategies and value-chain activities (Li et al., 2009; Rai et al., 2006, 2012). It is
suggested that IT capability, as part of a firms resource portfolio, could ensure the firm to
deploy appropriate IT applications effectively, and overcome the technological constraints
related to SCI (Devaraj et al., 2007). It is, therefore, not surprising that many firms such as
Cisco, General Electric, Wal-Mart, and Dell are trying to develop efficient strategies that
leverage their IT capability to facilitate SCI to achieve superior firm performance.
Although the promising and optimistic views of the significance of IT capability
with respect to efficient and effective SCM, evidences to date indicate that applying IT
capability to the management of a supply chain to achieve superior firm performance is
not an easy step in industry (Devaraj et al., 2007; Hall et al., 2012; Rai et al., 2006).
Indeed, some empirical research shows that IT capability cannot provide the expected
performance benefits in managing a supply chain (Ray et al., 2005; Tippins and Sohi,
2003; Wu et al., 2006). It is suggested that the role and articulation of the underlying
mechanisms through which IT capabilities improve firm performance remain unclear
(Mithas et al. 2011, p. 238). Given that firms make increasingly large investments in IT,
how best to reap the benefits of specific IT capability and how environmental factors
affect such a value-related process is becoming a vital concern for researchers and
practitioners (Ray et al., 2005; Tippins and Sohi, 2003; Wu et al., 2006).
The aim of this study is to extend the current understanding of how IT capability
affects internet-enabled SCI, which will eventually improve firm performance from a
resource-based view (RBV). Specifically, we will investigate the influence of two
internet-enabled SCI dimensions (i.e. the integration of demand processes and of
supply processes) on firm performance. According to the RBV, these two dimensions
of process integration interact as a higher-order organizational capability that is firm
specific and difficult to duplicate across the typical operations of different firms
(Rai et al., 2006; Wu et al., 2006). These two dimensions can further apply to the use of
the internet to overcome the tradeoffs between low cost, rich content, real-time data,
and broad deployment across the supply chain, which are faced by traditional
marketplace-based competition (Frohlich, 2002; Garca-Dastugue and Lambert, 2003;
Lancioni et al., 2003). Scholars thus indicate that these two forms of integration not only
streamline the flow of information, materials, and finances across the supply chain in
order to obtain a sustained competitive advantage, but also they help firms reap the full
benefits of IT capability (Esper et al., 2010; Frohlich and Westbrook, 2002; Osmonbekov
et al., 2009; Vaart and Donk, 2008).
 IJLM The current study further explores the role of two IT capability, namely IT
26,1 operational capability and IT transformational capability that affect internet-enabled
SCI. The existing literature indicates that IT operational and transformational capability
which differ with respect to IT applications deployment, are the two fundamental
components of IT competence (Ravichandran and Lertwongsatiem, 2000, 2005). IT
operational capability focusses on deploying IT applications to provide reliable and
174 consistent IT support to current business, and IT transformational capability emphasizes
deploying new IT applications to transform firms to create new business opportunities
(Ravichandran and Lertwongsatiem, 2000, 2005). It is suggested that these two IT
capability reflect the different mechanisms by which IT resource deployment facilitates
organizational capability such as SCI (Devaraj et al., 2007; Li et al., 2009; Rai et al., 2006;
Wu et al., 2006). Hence, investigating these two types of IT capability simultaneously
may shed new light on the benefits of IT capability and help resolve the problem of the
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current inconsistencies found in the extant literature.

Finally, we propose to use industry type as a moderator in our research model.
As indicated by Rosenzweig (2009) and Vaart and Donk (2008), failing to fully consider
the industry environment in which firms compete could incur mixed findings about the
relationship between SCI and firm performance. Industry type has been presented as a
surrogate variable comprising a set of comprehensive and relevant constructs, such as
organizational capabilities, business environment, business strategy, and technology
adoption (Neirotti and Paolucci, 2011). This indicates that different industry types
suggest different business objectives, interests, models, and environments all of which
would impact the benefit-realizing capacity of a particular strategy (Frohlich and
Westbrook, 2002; Johansson and Olhager, 2006). Frohlich and Westbrook (2002), for
example, propose that manufacturing and services industries may be different enough to
affect their need for improving performance by specific channel management capability.
Also, Zhu and Sarkis (2004) suggest industry type as being the potential moderator of the
relationship between SCM and firm performance. As such, incorporating industry type
in this study is consistent with the themes appearing in strategy and organizational
literature, and is helpful to understand the relationships between internet-enabled SCI
and firm performance.

2. Theoretical background and research model

RBV conceptualizes a firm as being comprised of a bundle of resources, and defines
strategic assets as rare, valuable, imperfectly imitable, and non substitutable resources
(Yeung, 2008, p. 493). It further indicates that a firms competitive advantage lies in
the application of higher-order organizational capability, which is enhanced by its
organizational resources (Barney, 2007; Rai et al., 2006). Higher-order organizational
capability reflects the firms heterogeneous and immobile ability which could
integrate, build, and reconfigure resources that are embedded in organizational
processes designed to respond to market changes (Barney, 2007; Rai et al., 2006;
Teece, 2007; Teece et al., 1997).
Accordingly, the relationships between IT capability, SCI, and firm performance
can be grounded in RBV. Specifically, IT capability, as part of a firms resource portfolio,
could facilitate the configurations and complementarity of resources both within and
across organizational boundaries (Kim and Lee, 2010; Ravichandran and Lertwongsatiem,
2005; Ray et al., 2005). It could be blended with interorganizational processes to develop
higher-order organizational capability for transferring information, sensing market
conditions, and coordinating operations across the supply chain (Devaraj et al., 2007;
 Li et al., 2009; Rai et al., 2006). For example, IT capability could provide an environment The impacts
conducive to enhancing the integration or alignment of supply or demand processes of IT
across the supply chain, which eventually impact firm performance.
Following the RBV, the literature indicates that a firms ability to integrate supply
capability
chain processes, such as demand processes and supply processes, could act as a critical
higher-order organizational capability (Devaraj et al., 2007; Flynn et al., 2010; Kim, 2009;
Li et al., 2009; Liu et al., 2010; Rai et al., 2006; Vaart and Donk, 2008). It is suggested that 175
processes consist of multiple interdependent and interlocking activities within the
value chain that are difficult to collectively duplicate and compete against, making
them a logical battle ground for competitive advantage (Esper et al., 2010, p. 5).
Accordingly, internet-enabled SCI, which is difficult for competitors to imitate, would
allow firms to achieve superior benefits along with a sustainable competitive
advantage in a given market. This study thus investigates how IT capability impacts
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firm performance through shaping higher-order organizational capability of internet-

enabled supply and demand process integration.

2.1 Internet-enabled supply and demand process integration

The construct of internet-enabled SCI embodies the nature of the processes that are
shared between firms in the supply chain process and the integration that is supported
by the internet. Internet-enabled demand and supply process integration thus refers to
the extent to which a firm strategically collaborates demand and supply side processes,
respectively, with channel partners based on the application of the internet (Devaraj
et al., 2007; Esper et al., 2010; Frohlich and Westbrook, 2002). Specifically, demand side
processes refer to the processes followed both inside and outside of a firm for generating
and maintaining demand, such as the processes of marketing, sales, and customer
relationship management. In contrast, supply side processes reflect the processes inside
and outside of the firm that are responsible for fulfilling the activities of supporting and
supplying the products and services, which consists of inbound and outbound logistics
(Esper et al., 2010; Flynn et al., 2010; Frohlich and Westbrook, 2002; Jttner et al., 2010).
Given the power of the internet to provide open, real-time, and global connections,
firms are increasingly infusing the internet into demand and supply processes

(Garca-Dastugue and Lambert, 2003; Ke et al., 2009; Lancioni et al., 2003; Lee and
Whang, 2004; Liu et al., 2010; Osmonbekov et al., 2009). In contrast to traditional
electronic data interchange systems, the internet has enhanced features that make the
integration of fragmented, silo-oriented supply chain processes more flexible and
affordable to smaller business (Devaraj et al., 2007; Ke et al., 2009; Zhu et al., 2006). The
internet enables firms to conduct information exchange and channel processes
coordination, such as sales, promotion, procurement, customer service, and delivery

schedule, without the constraints of time and space (Garca-Dastugue and Lambert,
2003; Lancioni et al., 2003; Lee and Whang, 2004; Zhu et al., 2006). Therefore, scholars
increasingly regard internet-enabled channel integration as being the new era of SCM
(Frohlich and Westbrook, 2001; Lee and Whang, 2004).
However, scholars also indicate that firms may vary in the intensity of internet-
enabled SCI depending upon the degree of internet-based demand integration and the
degree of internet-based supply integration in their strategy. These strategies can
range from little or no internet-based integration to total integration from customers to
suppliers (Devaraj et al., 2007, p. 1202). This indicates that considering the dimensions
of supply and demand process integration simultaneously is important for
understanding how the supply chain process integration operates (Flynn et al., 2010).
 IJLM As Figure 1 shows, the current study will investigate the influence of two IT capabilities
26,1 on the internet-enabled supply process integration and the internet-enabled demand
process integration simultaneously, and then study the impact of these two SCI on firm
performance.

2.2 The relationship between internet-enabled supply and demand process integration
176 and firm performance
The improvement in firm performance through supply and demand process integration
has been well-documented (Esper et al., 2010; Frohlich and Westbrook, 2002; Kim, 2009;
Vaart and Donk, 2008). The literature also indicates that by infusing the internet into
channel processes, firms may apply the integration of supply and demand processes
based on open, agile, global, and real-time connections and linkages in the supply chain
to improve customer responsiveness and manufacturing performance flexibly (Frohlich
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and Westbrook, 2001; Lee and Whang, 2004). This means that internet-enabled
integration allows firms to provide easier access to information, develop more
flexibility to respond to market changes, provide global customer service, reduce
service costs, and shorten product cycles, which are critical for firm performance
(Devaraj et al., 2007; Frohlich and Westbrook, 2002).
Internet-enabled supply process integration could improve upstream partners
understanding and anticipation of a firms needs (Flynn et al., 2010). Specifically, with
the aid of the internet, firms could exchange real-time information about supply
processes, schedules, capabilities, and activities with upstream partners globally. This
exchange leads to an improved understanding of ordering and shipping processes that,
in turn, can minimize the possibility of logistical errors (Osmonbekov et al., 2009). Firms
thus could effectively decrease the number of out-of-stock items, reduce expediting
costs, and increase responsiveness, thereby improving performance (Frohlich, 2002;
Lee and Whang, 2004). Further, supply process integration could decrease inter-firm
conflict and disagreements (Osmonbekov et al., 2009; Vaart and Donk, 2008). It thus can
increase the upstream partners commitment to making their resources complementary

Control variables
-- Ownership
IT operational Internet-enabled
H2a -- Firm Size
capability supply integration
-- IT department Size

H2b H1a

Firm
performance

H3a
H1b

IT transformational Internet-enabled
Figure 1. H3b demand integration
capability
The research
framework
 to those of other firms to coordinate the supply chain processes (Rosenzweig, 2009; The impacts
Vaart and Donk, 2008). With complementary resources, firms easily shorten the critical of IT
path for fulfillment activities of supporting and supplying the necessary products and
services (Esper et al., 2010; Frohlich and Westbrook, 2002):
capability
H1a. A firms internet-enabled supply process integration is positively related to its
performance.
177
Internet-enabled demand process integration may enhance firm performance through
improving the accuracy of demand information (Flynn et al., 2010; Frohlich and Westbrook,
2002; Osmonbekov et al., 2009; Rollins et al., 2012). Specifically, by using the internet to
detail the timing, amount, and content of downstream partners activities, this integration
could provide firms with improved visibility of demand processes and customer needs
(Osmonbekov et al., 2009; Rosenzweig, 2009). This demand-related information further
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enables firms to better organize and align their mutually dependent activities with those of
downstream partners, and then to monitor collaboration efforts with greater efficiency and
effectiveness (Frohlich, 2002; Lee and Whang, 2004; Osmonbekov et al., 2009; Rollins et al.,
2012). Further, the integration provides an efficient and interdependent coordination
mechanism, which could help firms reduce product design and production planning time
and cost as well as detect demand changes more quickly, thereby allowing them to be more
responsive to customer needs (Flynn et al., 2010; Frohlich, 2002):
H1b. A firms internet-enabled demand process integration is positively related to
its performance.
2.3 IT operational capability
IT operational capability reflects a firms ability to provide reliable and consistent IT
support to current business. It involves using IT applications to solve current business
problems and provides a focus on efficiency, consistency, and process control. Further,
IT operational capability could measure the extent to which a firms IT function helps
business operations be free from disruptions due to IT-related failures (Bharadwaj,
2000; Ravichandran and Lertwongsatiem, 2005; Ray et al., 2005). It provides firms with
the opportunity to efficiently operate specific IT applications to develop and build other
organizational capabilities (Bharadwaj, 2000; Wade and Hulland, 2004).
IT operational capability can enhance internet-enabled supply chain process
integration by maintaining and operating reliable information systems (Devaraj et al.,
2007; Li et al., 2009; Osmonbekov et al., 2009; Rai et al., 2006). As Vinum and Skjoldager
(2001) contends, reliable information systems enable the integration of demand or
supply processes not only at a technical level, but also at an application and business
management level. Specifically, IT operational capability allows firms to update current
IT infrastructure, integrate disparate data sources, and resist system failure to ensure
that they achieve reliable IT support to operate integrated demand or supply processes
at the technical level (Kumar, 2004; Li et al., 2009; Rai et al., 2006). Reliable and
consistent IT support also helps firms overcome the technological constraints of
internet implementation, which eventually facilitates infusing the internet into the
integration of supply and demand processes (Osmonbekov et al., 2009; Zhu et al., 2006).
Further, IT operational capability facilitates the flow of information for demand
forecasts, production schedules, delivery services, and inventory maintenance that
dictate the pattern of supply and demand processes at a business management level
(Li et al., 2009). Rai et al. (2006) argue that through an integrated IT infrastructure, firms
overcome the limitation of supply chain fragmentation which could constrain information
 IJLM flows and activity coordination, thereby realizing supply and demand process integration.
26,1 This indicates that based on consistent IT support, firms could easily overcome the
problem of disparate and fragmented business processes at the management level, and
then integrate demand and supply processes more effectively:
H2a. A firms IT operational capability is positively related to its internet-enabled
supply process integration.
178
H2b. A firms IT operational capability is positively related to its internet-enabled
demand process integration.
2.4 IT transformational capability
IT transformational capability refers to a firms ability to use IT applications to transform
itself to create new business opportunities (Ravichandran and Lertwongsatiem, 2005). This
ability reflects the differences of breadth and complexity of IT-enabled changes that firms
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could achieve, and of the firms transformation speed, such as the ability to accomplish
IT-enabled changes, both within and across organizational boundaries (Armstrong and
Sambamurthy, 1999; Liang et al., 2007; Tarafdar and Gordon, 2007). Therefore, in contrast
to IT operational capability, IT transformational capability focusses on search, innovation,
and discovery when trying to create new business opportunities via diffusing advanced IT
applications to support, shape, and enable new organizational processes (Armstrong and
Sambamurthy, 1999; Ravichandran and Lertwongsatiem, 2005).
As it helps firms to efficiently redesign business processes via IT applications, IT
transformational capability would be important for internet-enabled demand and supply
process integration (Kearns and Sabherwal, 2006; Yusuf et al., 2004). Specifically, IT
transformational capability enables firms to embed IT-related innovative ideas and values
into business processes both within and across firms (Kearns and Sabherwal, 2006). It
thus could facilitate the introduction of complex IT-enabled modifications such as
digitization in key business coordination activities in SCM (Rai et al., 2006; Ranganathan
et al., 2004). For example, it could help firms digitize their information flow between
customers via advanced IT applications such as customer relationship management. The
digitization ensures the teaming and free flow of information, and then extends the reach
and range of coordination with respect to demand processes, thereby leading to high
demand process integration (Kearns and Sabherwal, 2006; Yusuf et al., 2004).
Further, IT transformational capability allows firms to react to the changes in channel
process integration with both flexibility and speed. It is suggested that this ability could
facilitate improving manufacturing/operational flexibility and enhancing supplier or
customer linkages (Armstrong and Sambamurthy, 1999). For example, firms could use
this ability to quickly deploy IT resources to respond to the changes incurred by the
integrated supply or demand processes, and then ensure the success of the new internet-
enabled channel networks and business models (Frohlich and Westbrook, 2001; Lee and
Whang, 2004). This process thus indicates that IT transformational capability could help
firms effectively react to the new business opportunities and the challenges of achieving
better demand and supply process synchronization and coordination across the supply
chain (Ke et al., 2009; Ranganathan et al., 2004):
H3a. A firms IT transformational capability is positively related to its internet-enabled
supply integration.
H3b. A firms IT transformational capability is positively related to its internet-enabled
demand integration.
 2.5 The difference between manufacturing and services firms The impacts
We postulate that the relationships among IT capability, internet-enabled SCI, and firm of IT
performance are contingent on the type of industry in which firms operate. Specifically, we
categorized firms as being a manufacturing industry or a services industry based on
capability
whether firms manufactured physical products or provided services (Liu et al., 2010; Mitra
and Singhal, 2008). Previous research has shown that manufacturing and services firms
differ in terms of the level of IT use and the need for efficient supply and demand 179
management (Frohlich and Westbrook, 2002; Lee and Xia, 2006). According to Frohlich
and Westbrook (2002), services and manufacturing firms may be different with respect to
the characteristics of customer participation, intangibility, inseparability of production
and consumption, heterogeneity, perishability, and labor intensity. Some scholars also
indicate that the intangibility of services could highlight the greater importance of
customer relationships for service firms in developing a competitive advantage than for
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manufacturing firms (Perrien and Ricard, 1995). In this view, services firms require higher
levels of direct customer participation as compared to manufacturing firms, and hence
services firms would pay more attention to demand management to improve their
performance at the general level (Frohlich, 2002).
Accordingly, due to the different levels of inherent information intensity,
manufacturing and services firms would have differing needs for IT innovations (Lee
and Xia, 2006). For example, manufacturing firms may focus on the use of e-procurement,
including the use of the internet in the purchasing process to support upstream sourcing,
product selection with on-line catalogues, tendering, and order tracking and fulfillment,
for supplier integration. Service firms may emphasize the use of e-commerce, which includes
electronic tools for content or knowledge management, order management/tracking, and
sharing information about requests for quotations and for customer integration (Hong
et al., 2010; Neirotti and Paolucci, 2011). This difference could dictate the importance level of
IT operational and transformational capability which, in turn, causes the impacts of IT
capability on the internet-enabled supply and demand process integration to vary in the
manufacturing and services industries:
H4. The relationship among IT capability, the internet-enabled supply and demand
process integration, and firm performance will differ for manufacturing and
services firms.

3. Research method
3.1 Sampling and data collection
To test the research model, we conducted a survey study in China because China is
such a great powerhouse for global economics. More and more multinational firms
are operating either alone or collaboratively in China, and more Chinese firms are
becoming significant players in the international supply channels. To compete
domestically and internationally, firms located in China are increasingly dependent
on IT, especially inter-organizational systems designed to link with their supply
chain partners across the world (Das et al., 2006; Wang et al., 2006). In this view, China
is becoming an ideal setting to conduct supply chain research. This survey was
conducted in four cities: Shanghai, Nanjing, Suzhou, and Hefei, all of which are
located in the largest economic area of China: the Yangtze River delta. The key
informants were senior executives of manufacturing and services firms, such as
CEOs, senior vice presidents of operations management, or chief technology officers.
These executives were knowledgeable about the related issues being examined in this
 IJLM research, such as SCM and internet technologies. Further, they had the opportunity to be
26,1 in direct contact with their supply chain partners. This contact gave them an opportunity
to get to know their partners and their respective environments well. It is clear that senior
or middle management executives have the power and opportunity to either make or
affect their firms operations and executive decisions, such as those decisions regarding
supply chain relationships.
180 We randomly chose 1,000 firms based on the lists provided by local Industrial Park
Administrators, and sent them invitations to participate in our survey. Finally, we sent
600 questionnaires to senior executives who agreed to participate in the survey. After
discarding the incomplete questionnaires, we had a total of 261 useful questionnaires and
a response rate of approximately 26.1 percent. Followed Armstrong and Overton (1977),
we tested for the potential non-response bias. Through comparing the 2s of the key
measures of the responses from the first 25 percent of the respondents and those of the
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final 25 percent, we found that there were no significant differences between these two

n %
Industry
Manufacturing industry 112 42.91
Mechanical equipment 27 10.34
Electronics and electrical 23 8.81
Household application 15 5.75
Chemistry 20 7.66
Textiles and apparel 15 5.75
Automobile 12 4.60
Services industry 149 57.09
Finance 38 14.56
Retailing 22 8.43
Telecommunication 20 7.66
Real estate 20 7.66
Logistics 26 9.96
Information technology 23 8.82
Ownership
State-owned 104 38.85
Privately owned 75 28.73
Foreign-controlled 82 31.42
Number of employees
100 45 17.24
101-500 62 23.76
500-1,000 39 14.94
1,000-2,000 20 7.66
More than 2000 95 36.40
Number of IT employees
5 103 39.47
Table I. 6-10 46 17.62
Demographic 11-25 16 6.13
information More than 25 96 36.78
of samples Note: n 261
 groups on these items. This indicates that non-response bias was not serious in this study. The impacts
Table I shows the demographic information of the samples taken. of IT
3.2 Measures
capability
We developed measurement items based on previously validated measures in the extant
literature. All items were assessed using five-point Likert scales, ranging from strongly
disagree to strongly agree. To test content validity of the questionnaire, we first 181
interviewed nine executives from electronics, IT product and services, finance and
banking, and the automotive industry. Valuable feedback on the instrument, with respect
to both the appropriateness and sensitivity of the measurement items was collected.
Further, we invited three researchers from the areas of information systems and operations
management to review the questionnaire. Some revisions, such as clarifying the items and
the wordings, changing the format of the questionnaire and re-sequencing the questions,
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were made based on their comments and suggestions. Given that this research was to be
conducted in China, we finally translated the instrument into Chinese after completing the
original English version. The translation followed the translation committee approach
suggested by previous research (Van de Vijver and Leung, 1997). Specifically, we first
translated the questionnaire into Chinese and then back-translated it to English to ensure
an equivalence of meaning between the English and Chinese versions.
In this study, four measurement items for IT operational capability were adapted
from Saraf et al. (2007) and Bhatt and Grover (2005). We modified the scales to reflect
the extent to which a firms information systems were designed to support business
relationship easily, how they were organized and integrated to allow for rapid changes
as well as the degree to which they were compatible and scalable. Similarly, the scales
of IT transformational capability were adapted from Liang et al. (2007) and Lee (2007).
We adapted four items to measure a firms ability to explore new IT resources to
achieve business opportunities. Specifically, we assessed whether the firm had the
ability to constantly explore new innovative opportunities related to IT, to explore new
IT resources for future products/service, to explore new IT resources for future
business models, and to embed IT applications in management.
We developed four items for the internet-enabled supply process integration and internet-
enabled demand process integration based on the work of Osmonbekov et al. (2009), Frohlich
and Westbrook (2002), and on the observations made during our interviews. Specifically,
four items about internet-enabled supply process integration tested the extent to which the
firm integrated supply side processes, such as sharing information about inventory status
and planned order, making joint plans with respect to inventory requirements, and
coordinating procurement via the internet with channel partners. Similarly, four items about
internet-enabled demand process integration measured the degree to which the firm
integrated the various demand side processes, such as the joint development of demand
forecasts, joint plans for service support as well as joint plans for the introduction of new
products/services and rollover via the internet with channel partners.
Further, we measured firm performance through testing the executives perceptions
of their companys operational performance relative to that of key competitors. In the
existing literature, business performance has been considered a multi-dimensional
construct (Venkatraman, 1989; Nakata et al., 2008). However, SCI scholars normally
focussed on the operational benefits of SCI (Devaraj et al., 2007, Wong et al., 2011).
According to Rosenzweig et al. (2003) and Devaraj et al. (2007), the benefits of
integration must be translated into operational performance first, rather the multiple
measures of business performance. In this study, we used six items which were
 IJLM adapted from Rai et al. (2006) and Ravichandran and Lertwongsatiem (2005) to assess
26,1 how well the firm responded to new marketplace demands and met customer
requirements in terms of the speed of delivering products/service, responding to demand
changes, entering new markets, promoting new products/services, confirming customer
orders, and addressing customer complaints as compared to key competitors.
For the moderator of industry type, we treated it as a dummy variable, such that 1
182 indicates manufacturing industry, and 0 represents service industry, based on whether the
firm manufactured physical products or provided services. We further included three
control variables as follows: firm size, IT department size, and ownership. Specifically, firm
size was measured based on the number of full-time employees. Given that IT support is
necessary for the eSCMS adoption decision, we treated the size of the IT department of the
target firm as another control variable, which was measured by the number of employees
in the IT department. The control variable of ownership types was test based on the
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categorization of state-owned, privately owned, and foreign-controlled types.

4. Analysis and results

4.1 Common method bias
Given that all data were perceptual and collected from a single source at one point in
time, we used Harmons one-factor test to assess common method bias. The results
revealed five constructs with eigenvalues greater than 1.0, accounting for 69.12 percent
of the variance, while the first construct explained 17.35 percent of the variance. Thus,
common method bias was not a serious concern for this study (Carr, 2007). Meanwhile,
we compared the fit between the one-factor model and the measurement model to
further ensure that common method bias was not serious. The fit of the one-factor
model (2 2258.92, df 209) was considerably inferior to (p o 0.01) the fit of the
proposed model (2 541.71, df 199). This result further supported the fact that
common method bias would not impact the results of this study.

4.2 Measurement model

We employed the partial least squares (PLS) approach to analyze the data. This approach
is suitable for predictive research, especially for research under development that has not
been tested extensively (Teo et al., 2003). Its demands on measurement scales, sample size,
and residual distributions are minimal (Ehie, 2010). Specifically, this approach combines
the assessment of both the measurement model and the structural model, and assesses the
relationships between constructs and the relationships between the constructs and their
measurement items simultaneously (Barroso and Picn, 2012).
We tested the reliability, convergent validity, and discriminant validity of the
measurements. The results showed that all of the items loadings were up 0.70 criteria.
As Table II shows, the values of Cronbach ranged from 0.727 to 0.803, which
indicated the reliability of our measurement are good. Meanwhile, composite reliability

Constructs Items Cronbach Composite reliability AVE

IT operational capability 4 0.830 0.882 0.653
Table II. IT transformational capability 4 0.791 0.913 0.725
Results of Internet-enabled supply integration 4 0.819 0.902 0.697
confirmatory Internet-enabled demand Integration 4 0.727 0.895 0.681
factor analysis Firm performance 6 0.783 0.909 0.626
 ranged from 0.882 to 0.913, which were above the 0.70 recommended level. Further, The impacts
each constructs average variance extracted (AVE) scores ranged from 0.626 to 0.725, of IT
which were up 0.50 criteria (Fornell and Larcker, 1981). These results indicated that
convergent validity of our measurement instrument was good. On the other hand, we
capability
compared the relationship between the correlations among constructs and the square
root of AVEs to assess the items discriminant validity. The results presented in
Table III indicated that the square root of AVEs for each construct was greater than the 183
correlations between constructs, which confirms discriminant validity.
Further, since the three inter-construct correlations in Table III were higher than the
benchmark value of 0.60, we conducted a multicollinearity test. Our results showed that
the highest variance inflation factors was 2.189 and the lowest tolerance value was 0.531,
which indicated that multicollinearity was not a significant problem in our data set.
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4.3 Structural model

In Figure 2, we presented the results of the structural model analysis of the full sample
(n 261). The model explained 19.4-31.4 percent of the variance, and the results of the path
coefficients showed that all the path coefficients were positive and significant, which
supported H1-H3. Specifically, both the internet-enabled supply process (b 0.240, po0.01)
and the demand process (b 0.284, po0.01) integrations have significant and positive
influences on firm performance, which supported H1a and H1b. Further, the path coefficients
from IT operational capability to internet-enabled supply process (b 0.271, po0.01) and
demand process (b 0.323, po0.01) integration are both significant, which supported
H2a and H2b. In addition, IT transformational capability was found to significantly
impact both the internet-enabled supply process (b 0.219, po0.01) and the demand
process (b 0.300, po 0.01) integration. Thus, H3a and H3b were supported.
Further, to assess the moderating effects of industry type, we tested the research
framework on the manufacturing and services subsamples, respectively. In this study,
the categorization of manufacturing and services industry was based on whether a firm
manufactured physical products or provided services (Liu et al., 2010). As Table IV
shows, in the service subsample, the model explained 16.1-32.8 percent of the variance.
Meanwhile, the path coefficients from IT operational capability to the internet-enabled
supply process (b 0.240, po0.05) and demand process (b 0.336, po0.01) integration
were both significant, and the IT transformational capability significantly impacted the
internet-enabled supply process (b 0.213, po0.05) and demand process (b 0.312,
po0.01) integration too. Yet, the results showed that internet-enabled supply process
integration (b 0.165) did not significantly affect firm performance. Conversely, in the
manufacturing subsample, the model explained 27.6-31.1 percent of the variance.
The results suggested that both IT operational and transformational capability can
significantly impact the internet-enabled supply (b 0.360, po0.01 for operational
capability and b 0.213, po0.05 for transformational capability) and demand process
integration (b 0.317, po0.01 for operational capability and b 0.294, po0.01 for
transformational capability). Yet, we did not find a significant relationship between
internet-enabled demand process integration and firm performance (b 0.224).
We further used the same method as Huang et al. (2011) to compare the path
coefficiencies between manufacturing and service subsample. Table IV shows the t-values
for each comparison. The results showed that the internet-enabled supply process
integration has stronger influence on firm performance in manufacturing industry than in
service industry (t 9.336, po0.01). Comparably, the internet-enabled demand process
integration has weaker impact on firm performance in manufacturing industry than
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26,1

184
IJLM

Results of
Table III.

correlation testing
Mean SD
Full Services Manu. Full Services Manu. 1 2 3 4 5 6 7 8
1. IT operational capability 3.474 3.498 3.442 0.876 0.844 0.919 0.808
2. IT transformational capability 3.628 3.648 3.603 0.937 0.911 0.974 0.615 0.851
3. Internet-enabled supply integration 3.296 3.143 3.603 1.034 1.073 0.947 0.405 0.385 0.835
4. Internet-enabled demand integration 3.265 3.283 3.241 0.910 0.914 0.908 0.508 0.499 0.672 0.825
5. Firm performance 3.747 3.681 3.834 0.742 0.792 0.663 0.359 0.429 0.453 0.469 0.791
6. Firm size 0.233 0.222 0.101 0.074 0.068
7. Ownership 0.067 0.030 0.229 0.180 0.161 0.034
8. IT department size 0.319 0.363 0.106 0.136 0.130 0.693 0.126
Note: The diagonal elements are the square root of the AVE
 Control variables The impacts
-- Ownership of IT
IT operational Internet-enabled
capability
H2a : 0.271**
supply integration -- Firm Size capability
0.194 -- IT department Size

H2b : 0.323** n.s.

H1a : 0.240**
185
Firm
performance
0.264
H3a : 0.219**
H1b : 0.284**
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Internet-enabled
IT transformational H3b : 0.300** demand integration Figure 2.
capability
0.314 The PLS results
of the model with
full sample
Notes: With full sample (n = 261). * p < 0.05; * *p < 0.01

Manufacturing Service
Relationship (n: 112) (n: 149) Path difference

Internet-enabled supply integration

firm performance 0.316** 0.165 b 0.151, t 9.336, p o0.01
Internet-enabled demand integration
firm performance 0.224 0.357** b 0.133, t 8.126, p o0.01
IT operational capability
internet-enabled supply integration 0.360** 0.240* b 0.120, t 9.627, p o0.01
IT operational capability
internet-enabled demand integration 0.317** 0.336** b 0.018, t 1.519, p W0.10
IT transformational capability
internet-enabled supply integration 0.230* 0.213* b 0.017, t 1.287, p W0.10
IT transformational capability
internet-enabled demand integration 0.294** 0.312* b 0.018, t 1.519, p W0.10
R2: internet-enabled supply integration 0.293 0.161 Table IV.
R2: internet-enabled demand integration 0.311 0.328 Comparison of path
R2: firm performance 0.276 0.273 coefficiencies

in service industry (t 8.126, po0.01). Further, the results showed that only the
relationship between IT operational capability and internet-enabled supply process
integration has significant difference between manufacturing and service industry
(t 9.627, po0.01). The other relationships between the IT capability and supply chain
process integration were different insignificantly between manufacturing and service.

5. Discussions and implications

5.1 Discussion
Our findings with respect to the effects of IT capability, internet-enabled supply chain
process integration, and firm performance are not only consistent with those of prior
 IJLM studies, but also offer new insights into the association between IT capability and
26,1 operations management. Specifically, the analysis results of the full sample show that a
firms high-order organizational capability, namely its internet-enabled supply process
and demand process integration, can directly improve firm performance. These finding
are consistent with prior operations management studies (e.g. Frohlich and Westbrook,
2002; Li et al., 2009). Also, the results indicate that internet-enabled supply and demand
186 process integration could be significantly impacted by both IT operational and
transformational capability. These findings are consistent with what been proposed
by previous research in information systems (e.g. Devaraj et al., 2007; Rai et al., 2006;
Wu et al., 2006).
Further, our findings indicate that between manufacturing and services firms, the
relationships between internet-enabled supply and demand process integration and
firm performance would vary. Specifically, manufacturing firms performance would
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not be significantly impacted by internet-enabled demand process integration and

service firms performance would not be significantly affected by internet-enabled
supply process integration. The different levels of emphasis on supply and demand
management between manufacturing and services firms may be the potential explanation
for these findings (Frohlich and Westbrook, 2002). Specifically, many manufacturing
firms, especially firms located in the Yangzi River Delta of China, are manufacturing
factories of original equipment manufacturers, such as Flextronics, Acer, Solectron, Asus,
and so on. This characteristic indicates that these firms normally did not interact with
customers directly, but were instead generally focussed on manufacturing. As such,
internet-enabled demand process integration may have not been so important for their
performance improvement, and applying IT to such process integration would not be
their primary focus.
On the other hand, the finding of the insignificant relationship between internet-
enabled supply integration and performance for services firms is consistent with Frohlich
and Westbrook (2002), which suggested that compared to manufacturing firms, services
firms lag in adopting supply related IT applications. Further, services firms have a high
level of direct customer participation in the service process. As such, service firms
likely would pay less attention to internet-enabled supply process integration which
requires them to infuse the internet applications into supply processes to improve firm
performance.
Further, partners IT readiness may be another reason for the non-significant
influences of internet-enabled supply and demand process integration on firm
performance mentioned above. According to Wiengarten et al. (2010), to achieve the
benefits of e-business integration, the e-business readiness of partners is necessary.
However, the readiness of partners for e-business varies across industry types. For
example, partners of manufacturing firms normally emphasize the use of e-business
for supply integration whereas partners of service firms focus on the use of e-business for
demand integration (Hong et al., 2010; Neirotti and Paolucci, 2011). This would limit the
benefit received by manufacturing firms from internet-enabled demand integration and
prevent service firms from reaping the benefits of internet-enabled demand integration.
Finally, we find that IT operational capability has stronger influence on internet-enabled
supply process integration for manufacturing than for service. This finding is
consistent with our hypothesis. However, the results showed that the relationships
between IT transformational capability and internet-enabled SCI are not significantly
different between manufacturing and service. These findings are inconsistent with our
hypotheses and the existing literature which indicates that manufacturing and service
 does differ in terms of the level of IT use (Frohlich and Westbrook, 2002; Lee and Xia, The impacts
2006). Our findings help us understand that although manufacturing and service have of IT
different business objectives, interests, models, and environments, the influence of IT
capability on internet-enabled SCI are in the same way and at the same level.
capability

5.2 Limitations and implications

It is important to evaluate this studys results and contributions in light of its 187
limitations. First, while IT operational capability and IT transformational capability are
critical for firm performance, other forms of IT capability may affect firm performance
too. Future research can extend our study by examining the effects of other IT
capabilities on firm performance. Second, while operational performance is the first
benefit of SCI, business performance is also the important benefit of SCI. Future
research can enrich the findings of our study by investigating the multi-dimensional
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firm performance, which including operational and business performance

(Venkatraman, 1989 and Nakata et al., 2008). Third, the use of perceptual measures
of firm performance is another limitation. Although the subjective perceptual measures
have been found to strongly correlate with objective measures (Sheehan et al., 2007),
collecting objective data, especially on firm performance, would provide more convincing
research results. Fourth, the demography of the respondents in this study may limit the
generalizability of our findings. We collected data from senior executives in the Yangzi
River Delta of China. Given that most manufacturing firms are factories of OEM in
this area, we suggest that future research should collect data from different settings.
Finally, our study used a cross-sectional research design. However, IT transformational
capability is still developing and normally focusses on long-term IT implementation,
such as future products/services and future business processes. Using a cross-sectional
study to assess its various role in manufacturing and services firms would be difficult.
Thus, a longitudinal study may enrich our understanding of the function of IT
transformational capability.
Nevertheless, this study makes four theoretical contributions. First, this research
enriches the body of literature on operations management, especially that of SCM. It
also incorporates information systems with operations management by providing new
insights into the business value of IT operational and transformational capability in the
supply chain context. Second, this study reveals the influence of IT capability on firm
performance by empirically exploring the impact of IT capability on higher-order
organizational capability. Specifically, it indicates that both IT operational and
transformational capability are critical to developing internet-enabled supply and
demand process integration. As such, it empirically extends the application of the RBV
perspective and provides new avenues for future research that would investigate the
capability-enhancing role of IT within the SCM context. Third, this research also
explores the influences of internet-enabled supply and demand process integration on
firm performance. It suggests that both internet-enabled demand and supply process
integration can directly impact firm performance. In so doing it extends the existing
operations management literature on the relationship between SCI and firm
performance. Finally, this study also adds an industrial perspective to SCM and IT
business value literature. Specifically, this research explores the relationships between
IT capabilities, supply and demand process integration, and firm performance in the
context of manufacturing and services firms. The findings indicate that manufacturing
and services firms could reap the benefits of IT capabilities in different ways.
For example, manufacturing firms would achieve the benefits of IT capabilities
 IJLM through internet-enabled supply process integration, while service firms would
26,1 benefit from internet-enabled demand process integration.
This research also has practical implications. First, this research provides
insights into the importance of IT operational capability and IT transformational
capability with respect to firm performance. We suggest that managers should not
only establish IT operational capability to develop reliable information systems, but
188 also should embed new IT applications within and across organizational boundaries
to transform firms to IT-enabled organization. This means that firms should not
only maintain the stability of information systems to support their current business
operations, but also they should explore new IT resources to explore new business
opportunities. Second, the research provides managers with specific guidelines for
realizing the business value of IT investment in the management of a supply chain.
That is, managers need to apply IT capability to higher-order organizational
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capability, namely internet-enabled supply and demand process integration, so that

their firms can reap the benefits of IT capability. Third, we suggest that managers
should consider industry type when they attempt to reap the business value of IT
investment. For services firms, managers should focus on applying internet-enabled
demand process integration to improve firm performance. Similarly, managers in
manufacturing firms should depend on applying internet-enabled supply process
integration to improve firm performance.

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 Appendix The impacts
of IT
Constructs and measurement Loading capability
IT operational capability
The manner in which the components of our information systems are
organized and integrated allows for rapid changes 0.82 193
Our information system is designed to support new business
relationships easily 0.80
Our information systems are highly compatible 0.77
Our information systems are highly scalable 0.88
IT transformational capability
We continuously examine the innovative opportunities IT can provide
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for competitive advantage 0.89

We continuously explore new IT applications for future products/services 0.87
We continuously explore new IT applications for future business processes 0.89
We use IT applications in our management at a high degree 0.73
Internet-enabled supply process integration
We share the inventory level information with our key channel partner
via the internet 0.85
We share the planned order information with our key channel partner
via the internet 0.85
We and our key partners develop joint plans on inventory requirements
via the internet 0.83
We and our key partners coordinate procurement via the internet (e.g. online
order placement: place and track orders with suppliers; allow suppliers to
submit bids online) 0.81

Internet-enabled demand process integration

We and our key partners develop joint development of demand forecasts
via the internet 0.81
We and our key partners develop joint plans on new product/service
introduction and rollover via the internet 0.86
We and our key partners develop joint plans on service support
via the internet 0.84
We and our key partners coordinate new product/service introduction
via the internet 0.78

Firm performance
(Compared with our key competitors, we have better performance in)
Decrease in rapid respond to market demand change product/service
delivery cycle time 0.78
Rapid response to market demand change 0.79
Rapid entering new market 0.80
Rapid bring new products/services to the market 0.81
Rapid confirmation of customer orders 0.80
Rapid handling of customer complaints 0.76
Note: All items use five-point Likert scales anchored at 1 (strongly disagree) and 5 Table AI.
(strongly agree) Measurement items
 IJLM About the authors
26,1 Hefu Liu is an Associate Professor in the School of Management at the University of Science and
Technology of China. He earned his PhD degree with the University of Science and Technology
of China and City University of Hong Kong. He has published in Journal of Operations
Management, Decision Support Systems, Journal of Global Information Management,
International Journal of Operations and Production Management, Information Technology and
People, and in the academic conference ICIS, PACIS and AMCIS. Associate Professor Hefu Liu is
194 the corresponding author and can be contacted at: liuhf@ustc.edu.cn
Qian Huang is based at School of Management, University of Science and Technology of
China, Hefei, China.
Shabo Wei is based at School of Management, University of Science and Technology of China,
Hefei, China.
Liqiang Huang is based at Zhejiang University, Hefei, China.
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