How Does Information Technology Capability Enable Digital Transformation? Considering the Mediating Roles of Agility

Abstract

In turbulent business environments, the survival of firms hinges on their ability to speedily sense and react to environmental changes, which in turn leads to superior competitive positioning and improved firm performance. With the rapid development of digital technologies – such as social media platforms, smart mobile phones, cloud computing, and big data analytics – business and IT leaders are constantly exploring new opportunities that harness advances in digital technologies to transform their firms. In this paper, we investigate this phenomenon, which we call digital transformation. We draw on the organizational agility literature, IT capabilities literature, and the dynamic capabilities theory. Based on the dynamic capabilities theory and the hierarchy of capabilities, we distinguish between two types of processes: capability-building and competitive-action-generating processes. We propose that IT capability, a low-order capability, enables the higher-order capability of organizational agility, which in turn enables the firm to transform its products, processes, or business models radically. Our model also considers the important impact of leadership style on both capability-building and competitive-action-generating processes. More precisely, we argue that the process of successfully developing higher-order capabilities from lower-order capabilities is moderated by the presence of aligned transformational leadership. This paper contributes to the academic literature on IT and business strategy by determining why business organizations pursue and how they can achieve digitally enabled business transformations. Our theory extends the adopted overarching theory, the dynamic capabilities theory, by considering the influence of leadership style on both capability-building and competitive-action-generating processes. The paper provides important practical insights for business and IT leaders regarding how to build and utilize IT capabilities to generate competitive actions that contribute to success in turbulent business environments.

Keywords: Digital transformation, IT capability, Agility, Transformational leadership, Case studies, IT innovation, Strategy