ROLE OF INFORMATION TECHNOLOGY IN LEVERAGING PERFORMANCE: A STUDY IN SRI LANKAN BANKING SECTOR MASTER OF BUSINESS ADMINISTRATION IN INFORMAITON TECHNOLOGY H. S. E. SILVA Department of Computer Science & Engineering University of Moratuwa December 2007 + + + + i ROLE OF INFORMATION TECHNOLOGY IN LEVERAGING PERFORMANCE: A STUDY IN SRI LANKAN BANKING SECTOR By H. S. E. Silva The Dissertation was submitted to the Department of Computer Science & Engineering of the University of Moratuwa in partial fulfillment of the requirements for the Degree of Masters in Business Administration. Department of Computer Science & Engineering University of Moratuwa December 2007 + + + + ii DECLARATION I certify that this dissertation does not incorporate without acknowledgement any material previously submitted for a degree or diploma in any university to the best of my knowledge and believe it does not contain any material previously published, written or orally communicated by another person or myself except where due reference is made in the text. I also hereby give consent for my dissertation if it is accepted, to make available for photocopying and for interlibrary loans, and for the title and summary to be made available to outside organizations. ____________________ ____________ H. Sunari Elizabeth Silva Date To the best of my knowledge, the above particulars are correct. _____________________ ____________ Mr. Kithsiri Samarasinghe Date + + + + iii ABSTRACT During the last few years, when the field of strategic management evolved, strategy researchers have shown increasing interest in the role of information technology (IT) in formulation and implementation of strategies, and its impact on financial performance. As a result, the Resource Based View (RBV) was introduced and much research was carried out on the RBV for IT. This research examines existing literature, and integrates RBV with IT, and presents the results from a new empirical study for the banking industry of Sri Lanka. The objective of this study is to research on information technology and information technology related resource complementary factors that would bring performance variance in the banking industry of Sri Lanka. This study explains the ways in which that IT can be used as a competitive weapon by pointing out the complementary resource factors that needs to combine with IT to bring performance advantage. Here the focus is on human resource factors and organizational procedural factors that play a key role in enhancing the IT effectiveness. This is the first study carried out in the Sri Lankan banking industry to empirically specify the complementary factors that can synergy the impact of IT. The results were obtained by using SAS/STAT statistical software. The stepwise multivariate Principal Component Analysis (PCA) was carried-out to prove the necessary hypotheses. The survey was carried out for bank population of 23 licensed commercial banks and 14 licensed specialized banks. The findings shows that IT alone have not produced performance advantage in the banking industry, but resource complementary factors when combined with IT bring a performance advantage among Sri Lankan banks. The findings of this research suggest that, owing to IT similar IT usages by competitors in the banking industry, the extensive use of IT alone have not produced performance advantage. The results supports the RBV approach, and explains why sophisticated IT users did not generally outperform less sophisticated users, but banks that combined IT with complementary resources gain performance advantages over the others. + + + + iv ACKNOWLEDGEMENT There are a number of persons who helped and guided me in various ways to accomplish the successful completion of this project. With a deep sense of gratitude, I wish to acknowledge their invaluable contribution. First and foremost, I am extremely grateful to Mr. Kithsiri Samarasinghe for supervising my work in this research study and for his immense guidance throughout the thesis writing. I wish to extend my sincere gratitude to Ms. Vishaka Nanayakkara and to Dr. Sanath Jayasena, for the prompt comments and advices at each milestone of the research. I am deeply grateful to Lord Jesus Christ and Mother Mary for giving me guidance and strength to make my studies a success. I wish to thank all the bank managers and executive staff who filled and returned my questionnaires despite their busy schedules. Last but not the least, my warmest gratitude goes out to my mother Anna De. Silva, and especially to my brother Roshan Damian Silva, for all the support and encouragement given to me. My family actually kept my spirits high not only through the research work but also throughout my academic years. + + + + v LIST OF CONTENTS Page No. DECLARATION ................................................................................................................ ii ABSTRACT....................................................................................................................... iii ACKNOWLEDGEMENT ................................................................................................. iv LIST OF FIGURES ........................................................................................................... ix LIST OF TABLES.............................................................................................................. x INTRODUCTION .............................................................................................................. 1 1.1 Background......................................................................................................... 1 1.2 Research issues ................................................................................................... 3 1.3 Objectives of the study........................................................................................ 3 1.4 Significance of the study..................................................................................... 3 1.5 Methodology in brief .......................................................................................... 5 1.6 Scope and limitations of the study...................................................................... 6 1.7 Organization of the chapters in the research....................................................... 7 LITUREATURE REVIEW ................................................................................................ 8 2.1 Introduction......................................................................................................... 8 2.2 Information technology in banking sector .......................................................... 8 2.2.1 IT devices.................................................................................................... 9 2.2.1.1 Automated Teller Machines.................................................................... 9 2.2.1.2 Cash counter............................................................................................ 9 2.2.1.3 Currency detectors ................................................................................ 10 2.2.1.4 Telex machines ..................................................................................... 10 2.2.1.5 Cheque scanner ..................................................................................... 11 2.2.2 IT systems ................................................................................................. 11 2.2.2.1 Core banking system............................................................................. 11 2.2.2.2 Back office system................................................................................ 13 2.2.2.3 Trade finance system ............................................................................ 14 2.2.2.4 e-learning system .................................................................................. 14 2.2.2.5 Cheque Imaging and Truncation Systems ............................................ 15 2.2.3 Benefit of IT in banking sector ................................................................. 15 2.3 View of information technology in achieving competitive advantage ............. 16 2.4 Resource-based view (RBV)............................................................................. 18 2.5 Comparison of IT with resource based criteria................................................. 20 2.6 Resource complementariness............................................................................ 22 2.6.1 Complementary resources:........................................................................ 22 2.6.2 Co-specialized resources:.......................................................................... 23 2.7 Complementary resource topologies................................................................. 23 2.7.1 Complementary human resources............................................................. 25 2.7.2 Complementary organizational procedures .............................................. 29 2.8 Bank rating methodology.................................................................................. 33 + + + + vi 2.9 Conclusion ........................................................................................................ 34 BANKGROUND STUDY OF BANKING INDUSTRY................................................. 35 3.1 Analysis of the banking industry ...................................................................... 35 3.1.1 Licensed commercial banks...................................................................... 36 3.1.2 Licensed specialized banks ....................................................................... 37 3.1.3 Registered finance companies................................................................... 38 3.1.4 The structure of the banking industry ....................................................... 39 3.1.5 The structure of the finance industry ........................................................ 39 3.1.6 The structure of the licensed commercial banking sector......................... 41 3.1.7 The structure of the systemically important banks ................................... 42 3.2 Profile of systemically important banks ........................................................... 42 3.2.1 Bank of Ceylon ......................................................................................... 42 3.2.2 Commercial Bank of Ceylon Ltd.............................................................. 43 3.2.3 Hatton National Bank Ltd......................................................................... 43 3.2.4 People’s Bank ........................................................................................... 44 3.2.5 Sampath Bank ........................................................................................... 45 3.2.6 Seylan Bank Ltd........................................................................................ 46 3.3 Conclusion ........................................................................................................ 46 CONCEPTUALIZATION AND OPERATIONALIZATION......................................... 47 4.1 Introduction....................................................................................................... 47 4.2 Conceptualization ............................................................................................. 47 4.2.1 Definitions................................................................................................. 47 4.2.1.1 Information Technology ....................................................................... 48 4.2.1.2 Information Technology resources ....................................................... 49 4.2.1.3 Complementary resources based on IT................................................. 49 4.2.1.4 Complementary resource topologies..................................................... 50 4.2.1.5 Complementary human resources......................................................... 51 4.2.1.6 Complementary organization procedures ............................................. 54 4.2.2 Hypotheses of the study:........................................................................... 58 4.2.3 Conceptual Model.................................................................................... 59 4.2.4 Research Objectives:................................................................................. 59 4.3 Operationalization............................................................................................. 60 4.3.1 Complementary human resources............................................................. 60 4.3.2 Complementary organizational procedures .............................................. 61 4.3.3 Information Technology ........................................................................... 61 4.3.4 Banking performance................................................................................ 62 RESEARCH DESIGN AND METHODOLOGY ............................................................ 63 5.1 Introduction....................................................................................................... 63 5.2 Nature of the study............................................................................................ 63 5.3 Research Strategy.............................................................................................. 64 5.3.1 Literature survey ................................................................................... 64 5.3.2 Discussion with banking experts .......................................................... 64 5.3.3 Mockup test........................................................................................... 65 5.4 Time horizon of the study ................................................................................. 66 + + + + vii 5.5 Data collection methods.................................................................................... 66 5.6 Measurements of the variables.......................................................................... 66 5.7 Methods of data analysis................................................................................... 69 DATA PRESENTATION AND ANALYSIS .................................................................. 70 6.1 Introduction....................................................................................................... 70 6.2 Univariate Analysis........................................................................................... 71 6.2.1 Licensed commercial banking sector....................................................... 71 6.2.1.1 Complementary human resources......................................................... 71 6.2.1.2 Complementary Organizational procedures ......................................... 72 6.2.1.3 IT Resource........................................................................................... 73 6.2.2 Licensed specialized banking sector......................................................... 74 6.2.2.1 Complementary Human resource ......................................................... 74 6.2.2.2 Complementary Organizational Procedures ......................................... 75 6.2.2.3 IT Resource........................................................................................... 76 6.3 Descriptive Statistics:........................................................................................ 77 6.3.1 Descriptive statistics of the Sri Lankan banking industry ........................ 77 6.3.2 Descriptive statistics of the licensed commercial banking sector............. 77 6.3.3 Descriptive statistics of the licensed specialized banking sector.............. 78 6.3.4 Comparison of Descriptive Statistics LCB Vs. LSB ................................ 79 6.4 Multiple Regression Analyses .......................................................................... 80 6.4.1 Licensed commercial banking sector........................................................ 80 6.4.1.1 Banking performance Vs. Human resources ........................................ 80 6.4.1.2 Banking performance Vs. Organizational procedures .......................... 81 6.4.1.3 Banking performance Vs. Information technology .............................. 82 6.4.2 Licensed specialized banking sector......................................................... 84 6.4.2.1 Banking performance Vs. Human resources ........................................ 84 6.4.2.2 Banking performance Vs. Organizational procedures .......................... 85 6.4.2.3 Banking performance Vs. Information Technology ............................. 86 6.5 Stepwise Multivariate Principal Component Analyses: ................................... 88 6.5.1 Multivariate PCA for licensed commercial banks .................................... 88 6.5.2 Multivariate PCA for licensed specialized banks: ................................... 91 DISCUSSION................................................................................................................... 94 7.1 Findings of the Research................................................................................... 94 7.1.3 Regression Analysis.................................................................................. 94 7.1.4 Stepwise Multivariate Principal Component Analysis ............................. 96 7.2 Further discussion ............................................................................................. 96 7.3 Comparison with preceding research findings / literatures............................... 98 7.3.1 Resource Based View ............................................................................... 98 7.3.2 Strategic Necessity Hypothesis................................................................. 99 CONCLUSION AND RECOMMENDATION.............................................................. 100 8.1 Conclusion ...................................................................................................... 100 8.2 Recommendations........................................................................................... 102 8.3 Comments for future research......................................................................... 104 + + + + viii APPENDIX A – QUESTIONNAIRES USED IN THE STUDY................................... 113 APPENDIX B – LISTED BANKS................................................................................. 120 APPENDIX C – DESCRIPTIVE STATISTICS ............................................................ 129 + + + + ix LIST OF FIGURES Page No Figure 3.1 – Sri Lankan banking industry asset distribution 39 Figure 3.2 – Sri Lankan banking sector asset distribution 40 Figure 3.3 – Licensed commercial banking sector asset distribution 41 Figure 3.4 – Systemically important bank asset distribution 42 Figure 4.1 – Conceptual Model of the study 59 Figure 6.1 – Human resources of licensed commercial banks 71 Figure 6.2 – Organizational procedures of licensed commercial banks 72 Figure 6.3 – IT resources of licensed commercial banks 73 Figure 6.4 – Human resources of licensed specialized banks 74 Figure 6.5 – Organizational procedures of licensed specialized banks 75 Figure 6.6 – IT resources of licensed specialized banks 76 + + + + x LIST OF TABLES Page No Table 3.1 – List of Sri Lankan licensed commercial banks 36 Table 3.2 – List of Sri Lankan licensed specialized banks 38 Table 3.3 – Systemically important banks 41 Table 5.1 – Relationship between variables used and measurements 67 Table 6.1 – Multiple Regression Analysis: human resources of LCB Sector 80 Table 6.2 – ANOVA results: human resources of LCB sector 81 Table 6.3 – Multiple Regression Analysis: organizational procedures of LCB 81 Table 6.4 – ANOVA results: organizational procedures of LCB sector 82 Table 6.5 – Multiple Regression Analysis: IT resources of LCB sector 83 Table 6.6 – ANOVA results: IT resources of LCB sector 83 Table 6.7 – Multiple Regression Analysis: human resources of LSB sector 84 Table 6.8 – ANOVA results: Human Resources of LSB sector 85 Table 6.9 – Multiple Regression Analysis: organizational procedures of LSB 85 Table 6.10 – ANOVA results: organizational procedures of LSB sector 86 Table 6.11 – Multiple Regression Analysis: IT resources of LSB sector 87 Table 6.12 – ANOVA results: IT resources of LSB sector 87 Table 6.13 – Eigen values of complementary resources for LCB sector 88 Table 6.14 – Summary of multivariate stepwise PCA: licensed commercial banks 89 Table 6.15 – Eigen values of complementary resources for LSB sector 91 Table 6.16 – Summary of multivariate stepwise PCA: licensed specialized banks 92 Table B.1 – Domestic LCB 120 Table B.2 – Foreign LCB 122 Table B.3 – National level LSB 125 Table B.4 – Regional Development Bank (RDB) 127 Table C.1 – Descriptive statistics for banking industry 129 Table C.2 – Descriptive statistics for LCB sector 129 Table C.3 – Descriptive statistics for LSB sector 130 + + + + xi LIST OF ABBREVIATIONS CEO Chief Executive Officer HR Human Resources IS Information Systems IT Information Technology LCB Licensed Commercial Banking LSB Licensed Specialized Banking OP Organizational Procedures PCA Principal Component Analysis RBV Resource Based View SAS Statistical Analysis Software SIB Systemically Important Banks