The Impact of IT-enabled Manufacturing Capabilities on Plant Profitability: New Models and Evidence

We propose and conceptualize a new measure of information technology-enabled manufacturing capability, based on a plant’s ability to use its mix of inputs to maximize its process outputs, and study the impact of these capabilities on manufacturing plant profitability. Our study extends the literature on IT-enablement of process capabilities using Data Envelopment Analysis, a non-parametric approach to estimate relative efficiency. We empirically test our models using data from U.S. plants in 2006 and 2007. Our results suggest that manufacturing capabilities and IT spending are positively associated with plant profitability. In addition, we observe that manufacturing process capabilities partially mediate the effect of IT spending on profitability. Our study makes two salient contributions. First, we conceptualize and test a new measure of organizational capability based on the relative efficiency of converting plant resource inputs into process outputs. Second, our findings reveal new pathways through which IT spending can impact plant profitability.