2008:037
M A S T E R ' S T H E S I S
Impact of Information Technology on Productivity
Ahmad Sobhani
Luleå University of Technology Master Thesis, Continuation Courses
Marketing and e-commerce
Department of Business Administration and Social Sciences Division of Industrial marketing and e-commerce
2008:037 - ISSN: 1653-0187 - ISRN: LTU-PB-EX--08/037--SE
MASTER'S THESIS
Impact of Information Technology on Productivity
A case study in Telecommunication industry of Iran
Supervisors:
Dr. Mohammad.T. Hamidi Beheshti Dr. Deon Nel
Referee:
Dr. Abbas Asosheh Dr. Anne Engstrom
Prepared by:
Ahmad Sobhani
Tarbiat Modares University Department of Industrial Engineering
Luleå University of Technology
Department of Business Administration and Social Sciences Division of Industrial Marketing and E-Commerce Joint MSc. program in Marketing and Electronic Commerce
2008
Abstract
Productivity is an important economic factor which has a key role in evaluating the economic growth. It is identified as the foundation for economic prosperity, a prerequisite for national development and also an important indicator of organizational competitiveness (Dedrick et al., 2003).
Information Technology (IT) is one of the important resources for increasing the economic growth. It causes companies to use their input resources as much as possible in an effective way. As investment in IT capital accounts for an ever-increasing share of capital investment, it is important to understand how these investments might pay off (Gilchrist et al., 2001).There has been much debate on whether or not the investment in IT provides improvements in productivity and business efficiencies.
IT investment may make little direct contribution to overall performance of companies until they are combined with complementary investments in business activities, human capital, and company restructuring. Therefore, according to role of IT in Business Process Reengineering, as a facilitator and enabler, BPR is valuable for companies to increase the impact of IT on overall performance of companies. On the other word, both IT and BPR investments, together, are able to improve productivity drastically.
In this research Cobb-Douglas model was used to examine the impact of Information Technology investment on productivity at Telecommunication Company of Tehran (TCT).44 financial and economic data were collected since 1997 up to 2007 for driving the corresponding model. Weighted Least Square (WLS) was run by SPSS 15 to test hypotheses. The results have indicated that IT investment not only makes the positive contribution to output of Telecommunication Company of Tehran but also this contribution is positive after deductions for depreciation and labor expenses. Further productivity analysis exposed the positive correlations between IT, Total Factor Productivity and Labor Productivity.
In order to reveal the importance of BPR approach as a complementary investment for improving IT influences, the appropriate questionnaires distributed through Employees and Experts of TCT in the second phase of this study. Evaluation of BPR factors proved the necessity of employing this complementary investment at Telecommunication Company of Tehran.
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Acknowledgment
I would like to extend my sincerest thanks and regards to all those who supported and encouraged me during my study.
First, I would like to express my Special gratitude to Dr. Amir Albadvi at the Department of Industrial engineering, Tarbiat Modares University, and Dr. Esmail Salehi-Sangari at the Division of Industrial Marketing and E-Commerce, Luleå University of Technology, for their continuous efforts in conducting this joint program of Marketing and e-Commerce.
Additionally, I would like to express my gratitude to Dr. Mohammad.T.Hamidi Beheshti, Professor at the Faculty of Engineering, for his supervision and valuable assistance. Without his continuous encouragement and support, it would not have been possible for this thesis’s completion. I would also like to express my special thanks to my Luleå University of Technology supervisor; Dr. Deon Nel, who has given me this pleasure to use his valuable comments, feedbacks and suggestions during the time that I have been working on this thesis.
Separate thanks to experts at Iran Telecommunication Research center who give me a lot of their working and even personal times.
My deep gratitude is expressed to my family and friends whose love and support have made years of study an enjoyable and unforgettable experience. My father and mother deserve special and heartfelt thanks for their support and patience during my work on this thesis.
Ahmad Sobhani February 15th, 2008
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Table of content
Abstract……… 1
Table of content ………... 3
Chapter One: Introduction and Problem statement………... 9
1-1. Back ground……….. 9
1-2. Problem Area and Discussion………... 12
1-3. Purpose of the research………. 14
1-3-1. Objective of the research………. 15
1-4. Importance of the research……… 15
1-5. Research Questions………... 16
1-6. Our contribution……… 17
1-7. Disposition of the thesis……… 17
Chapter Two: ICT in Iran………. 19
2-1. Introduction………... 19
2-2. ICT in Iran………. 20
2-2-1. ICT indicators……….. 21
2-3. Information Technology sector in Iran………. 25
2-4. Telecommunication Company of Tehran………. 26
2-4-1. ICT indicators ………. 26
Chapter Three: Literature Review……….. 29
3-1. Productivity………... 29
3-2. Common minus of the term……….. 31
3-3. Basic types of productivity………... 31
3-3-1. Partial productivity……….. 31
3-3-2. Total Factor Productivity………. 32
3-3-2-1. Source of TFP growth………. 32
3-4. Benefits of productivity measurement of organizations………... 33
3-5. Benefits of higher productivity in organizations……….. 34
3-6. Economic performance………... 34
3-7. Information Technology and Productivity……… 35
3-8. The productivity paradox……….. 37
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3-9. IT opportunities for development………. 39
3-10. Role of IT in the production process……….. 42
3-11. IT and Labor ……….. 43
3-12. IT, Coordination and Firm output………... 44
3-13. Production Function Model……… 45
3-13-1. Cobb- Douglas function………... 46
3-13-2. Translog function model……….. 47
3-14. Decision tree technique………... 47
3-15. Reengineering………. 49
3-16. Business process………. 50
3-17. Business Process Reengineering………. 50
3-18. BPR approach………. 52
3-18-1. Importance of BPR approach……… 53
3-18-2. Attributes of BPR approach……….. 53
3-19. Radical changes, Top management, Strategic thinking……….. 55
3-20. BPR characteristics………. 56
3-21. Potential BPR impacts……… 56
3-22. Principles in BPR………... 56
3-23. Impact of Information Technology on BPR………... 57
3-24. Role of IT on BPR……….. 58
3-25. Benefits of IT – enabled BPR………. 60
3-26. IT tools for BPR……….. 62
3-26-1. Enterprise Resource Planning……… 63
3-26-2. Outsourcing………... 63
3-26-3. Enterprise software……… 63
3-26-4. Internet………... 64
3-26-5. Intranet………... 64
3-26-6. Electronic data interchange………... 65
3-26-7. Knowledge management………. 65
3-26-8. Legacy system………. 66
3-27. Digitized information effects on business process……….. 66
3-28. Conceptual framework……… 67
3-28-1. IT and Productivity……….. 68
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3-28-2. Production function model……….. 69
3-28-3. BPR, IT and Productivity……… 69
3-28-4. Frame of reference………... 70
Chapter Four: Research Methodology………. 73
4-1.Research process.………... 73
4-2. Research design……… 74
4-3. Type of research……… 74
45-3-1. Reporting research………. 75
4-3-2. Descriptive research……… 75
4-3-3. Explanatory research………... 75
4-3-4. Predictive research……….. 75
4-4. Research approach……… 76
4-4-1. Deductive vs. Inductive………... 76
4-4-2. Qualitative vs. Quantitative………. 76
4-5. Research strategy……….. 77
4-6. Sample selection………... 78
4-7. Classification of data……… 79
4-8. Data collection……….. 79
4-9. Reliability……….. 81
4-10. Validity………... 82
Chapter Five: Data analysis……….. 84
5-1. Telecommunication Company of Tehran………. 85
5-2. First phase analysis………... 85
5-2-1. Data sources………. 86
5-2-2. Hypotheses………. 87
5-2-3. Methodology……… 88
5-2-3-1. Linear regression……… 88
5-2-3-2.Weight estimation……… 89
5-2-4. Data analysis………. 90
5-2-5. Further Productivity analysis……… 93
5-2-5-1. Total Factor Productivity……….. 93
5-2-5-1-1. Method of Kendrick……….. 93
5-2-5-1-2. Method of Dujea………... 94
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5-2-5-2-1-3. Method of Solow……… 94
5-2-5-2.Labor Productivity………... 95
5-2-5-3. Correlation……… 97
5-3. Second phase analysis………... 98
5-3-1. Hypotheses………... 100
5-3-2. Data sources………. 100
5-3-3. Methodology………. 101
5-3-3-1. 2-paired T-test……….. 101
5-3-4.Data analysis………. 103
5-3-5. Cross analysis………... 106
5-3-5-1. Performance Quality………. 106
5-3-5-2. Information Technology………... 108
5-4. Summary of the results………. 110
Chapter Six: Conclusions and Future Suggestions……… 111
6-1.Remarks on the first research question……….. 112
6-2. Remarks on the second research question……… 113
6-3. Conclusion……… 115
6-4. Implications……….. 116
6-5. Recommendations for future research……….. 117
Reference………. 118
Appendix A………. 126
Appendix B………. 130
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List of Tables
Table 2.1 Status of Telephone in Iran 21
Table 2.2 Status of Mobile phone in Iran 23
Table 2.3 Computers’ diffusion among various user groups 23
Table 2.4 Number of Internet users 24
Table 2.5 Internet penetration in designated countries 24
Table 2.6 E-commerce indicators 2004-09 25
Table 2.7 Status of Telephone in Tehran province 26 Table 2.8 Number of online Mobile phones in Tehran province 27 Table 2.9 ICT indicators in Telecommunication Company of Tehran 27 Table 2.10 Financial indicators of Telecommunication Company of Tehran 28 Table 3.1 Labor productivity growth by industries in US 1989-1999 36 Table 3.2 The annual percentage of GDP devote to expenditure on ICT 41 Table 3.3 Alternative estimates of the acceleration of productivity growth 42
Table 4.1 Reliability of the questionnaire 82
Table 5.1 Coefficients related to Cobb-Douglas model 90
Table 5.2 Strength analysis of Findings 90
Table 5.3 Calculated findings for relationship between IT and productivity after deducting the ICT costs
91
Table 5.4 The Average of IT and non IT capital 92
Table 5.5 Correlation coefficient of IT capital and Labor productivity 97 Table 5.6 Correlation coefficient of IT capital and TFP 98 Table 5.7 Descriptive findings of second phase analysis 101
Table 5.8 2 paired t-test 102
Table 5.9 Parameters of 2 paired t-test 103
Table 5.10 Statistic findings for performance quality 103 Table 5.11 Paired test findings for performance quality 104 Table 5.12 Statistic findings for Information Technology 104 Table 5.13 Paired test findings for Information technology 105 Table 5.14 Paired test findings for performance quality indicators 107 Table 5.15 Paired test findings for IT indicators 109
Table 6.1 Summery of final results 114
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Figure 1.1 Thesis outline 18
Figure 3.1 Labor productivity of US 37
Figure 3.2 Contribution of IT and non IT capital in GDP 39 List of Figures
Figure 3.3 BPR schematic 52
Figure 3.4 Kobu conceptual model 62
Figure 3.5 Impact of using IT on business benefits 67
Figure 3.6 BPR indicators 71
Figure 4.1 Research process 74
Figure 5.1 TFP of Telecommunication Company of Tehran 95
Figure 5.2 Indicators of TFP 95
Figure 5.3 Labor productivity of Telecommunication Company of Tehran 96
Figure 5.4 Indicators of Labor productivity 96
Figure 5.5 BPR main factors 99
Figure 5.6 Expected performance quality improvements 108 Figure 5.7 Expected Information Technology improvements 109
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Chapter One
Introduction and Problem Statement
This chapter begins with background in productivity as an economic factor and Information technology. This will be followed by problem area discussion, the purpose of the research and the main objectives and importance of the study. The main questions which are investigated within scope of research will be introduced. Finally, our contribution and overview of entire thesis are presented.
1-1. Background
Strong Competition causes the new technologies to be employed for improving productivity level of companies’ resources. Productivity is one of the important factors to evaluate the economic growth both at the industry and firm level. Its growth directs companies to increase their market share (Tabatabae, 2000).
At the most basic level, productivity is based on the economics of the firms. It is measured as the ratio of output to input. Historically, productivity is often defined as the ratio of output to the most limited or critical input, with all the other inputs held constant.
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Based on Neo-classical economic model, productivity is one of the important factors that impact on economic growth. It causes Companies to produce more products through specified production’s factors, and to optimize the employment of the production’s requirements (Solow, 1956).
Improving the productivity is fundamental to survival companies in a very competitive market. The purpose of all productivity-related attempts is to make lasting improvements in performance. Productivity is also the best methods we have to fight inflation, reduce unemployment, enhance profits, reduce costs, create capital and wealth and improve the quality of working life. (Drucker, 2001) clearly, indicated the importance of productivity as an economic indicator when he stated “Without productivity objectives, a business does not have direction.
Investigation of the productivity achieves the following results:
• The resources efficiency will be judged.
• Evaluation of resources management will be facilitated (Kazemi, 2003).
Measuring the productivity growth causes companies to evaluate the factors that affect on value added such as IT, Innovation ant etc (NPC productivity report, 2003).
Current business activity is characterized by intense international, rapid product innovation, increased use of automation, and significant organizational changes in response to new manufacturing and information technologies (Dirks, 2005).
Information technology (IT) is one of the valuable resources to increase the economic growth and customer satisfaction. It has a potential to impact on the structure of organizations and improve the quality of organizational performance significantly.
In the 1980s, IT was heralded as a key to competitive advantage (Porter and Millar, 1985). Porter and Millar (1985) concluded that IT has influenced competition in three ways: it has led to changes in industry structure and competition, it was used to support the creation of new businesses, and companies using IT outperformed their competition. Although IT as a critical factor to competitive advantage became less certain in the recent years, the high percentage of top executives considered IT as a key to a company's profitability and survival. This issue causes IT to pose a serious
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dilemma for top management. On one hand, continuing IT innovations have the potential of changing the competitive game for many organizations. On the other hand, the size of the IT investment puts increasing pressure on managers to assess its business value (Mukhopadhyay, et al., 1997).
For many years, there has been much discussion about whether the IT revolution was paying off in higher productivity. Studies in the 1980s found no positive relationship between IT investment and productivity, a situation referred to as the productivity paradox (Dedrick et al., 2003). Since then, decades of studies at the firm and country level has consistently shown that the impact of IT investment on productivity and economic growth is significant and positive.
Albadvi and Keramati (2006) also provided the satisfactory evidences to show that IT implementation increase productivity when supported by rational complementary investment.
In the face of extreme competition and economic pressures, firms are changing their fundamental unit of analysis from the business function to the business process. IT investments may make little direct impact on the overall performance of the firms or the economy until they are combined with complementary investments in business activities, human capital, and companies redesigning. Therefore, according to the role of IT in Business Process Reengineering (BPR), as an enabler, BPR is essential for corporations to enhance the potential impacts of IT on their performances. On the other word, both IT and BPR investments, together, are able to improve productivity drastically.
Despite the fact that little more than 10 years ago Iran was backward technologically among the Middle East countries, it has been considered as a successful example of fast introduction of information technologies, recently.
The GDP growth of 6.9% in June 2005 places Iran among the fastest growing economies in the region. The economy has grown by an average 5% every year since 1999. The continued growth of exports to Middle East and western markets, integration with Asian countries, and institutional and regulatory reforms has thus laid a strong foundation for sustainable economic growth. The economy is likely to grow 11
by 5- 6 percent per year in near future (Central Bank of the Islamic Republic of Iran, 30th June 2006; cited Pourmirza, 2006).
The Average of the annual economic growth has been calculated 8 percent in fourth cultural, social and economic development plan of Iran (2005-09). 2.5% of the mentioned growth should be obtained by productivity. Besides, in order to achieve the above economic growth, all governmental sectors have to establish 31.3% of their GDP growth via Total Factor Productivity (TFP). And labor productivity, capital productivity and TFP would be at least 3.5%, 1% and 2.5% raised annually. Therefore, all activities and investments cause to achieve the above goals and extract the resources of organizations in the optimum ways are considered.
Telecommunication Company of Tehran (TCT) is one of the powerful companies which have continued business activities independently since 1995. TCT serves communication services and infrastructures. It is identified as a government company which has positive balance of finance. Therefore, TCT has a key role in the economic growth of Iran. The positive impact of IT investment on productivity causes TCT to increase its capacity for stay in competitive telecommunication market.
This research identifies and describes the impact of IT investment on productivity at Telecommunication Company of Tehran. Furthermore, the situation of BPR approach in TCT, as a method to improve the IT influences, is evaluated.
1-2. Problem Area Discussion
More recently, the continuous movement towards globalization has made information technology one of the most important factors in achieving success as well as in seeking new markets, improving quality and providing better and faster customer service.
Many of the recent studies have shed some light on the impact of IT on economic growth, productivity, employment, work organization and competitiveness (Satti, 2002).
Productivity at the organizational level is affected by the level of competition, which leads other organizations to step up the development of their productivity (Dedrick et al., 2003). Increased productivity, however, does not necessarily imply increased profitability. Competition may result in lower prices, thus eroding improvement in 12
margins. The beneficiaries will then be consumers, who get more value added for the price paid (Dedrick et al., 2003).This phenomenon is defined as consumer surplus.
IT has made rationalization possible in organizations by minimizing human involvement. These aspects of IT are labeled as automational (Zuboff, 1988).
Increased access to information and enhanced means of accessing, analyzing, storing and communicating information can result in effects in addition to pure rationalization.
These aspects are defined as informational (Zuboff, 1988) informational aspects empower employees and enrich quality of decisions and performances.
Transformational is the third type of effects which encompasses the changes observed in process innovation and transformation. Another type of effects is identified by Hitt
& Brynjolfsson (1996), who discuss the importance of the increased value perceived by consumers as a result of technological improvements. This phenomenon is defined as consumer surplus (Mooney et al., 1996).
IT is known as the productive resource to increase the economic growth, productivity and customer satisfaction. It has an effective role to enhance the quality of communication services. IT can be gainful in the communication services when appropriate successful BPR is implemented in the different parts of companies (Limayem, 2006). Moreover telecommunications service provider’s survival depends on its ability to prepare for changes in customer needs, as well as changes in regulation and technology (Fornell and Wernerfelt, 1987; Reichheld and Sasser, 1990).
BPR begins with process redesigning which leads to fundamental changes in many aspects of an organization, including organizational structure, job characteristics, performance measures and the reward system. BPR relies heavily on the IT uses to create radically different working methods to achieve improvements of the order of magnitude required. Furthermore, BPR facilitates the change in corporate management’s perception of technology. It also confirms an alternative channel through which IT solutions are being scrutinized and selected (Soliman, 1997).
Productivity growth arises from the development of new work methods based on new technology and production techniques. Consequently, when the new technology of IT was introduced in working life, productivity growth was expected. But, because computers were initially used in a situation where productivity growth had been low
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and unemployment had been high since the mid-1970s, it was initially difficult to prove positive effects of investments in IT (Lundgren and Wiberg, 2001). Solow referred to this situation when he stated, “You can see the computer age everywhere but in the productivity statistics” (Solow, 1987). This phenomenon was later defined as the productivity paradox (Horzella, 2005). Of late, however, firm-level studies, in the manufacturing and service sectors, have shown that there are significant positive contributions from IT investments toward productivity (Harker, 2000).
1-3. Purpose of the research
Nowadays, there are strong competitions among corporations which serve the communication services. Therefore, they not only employ information technologies through the organizational levels to improve the performance quality but also use the newest technologies to cover customers’ needs.
There has been much discussion on whether or not the IT investment provides improvements in productivity and business efficiency. Several studies at the industry- level and at the firm-level have contributed differing understandings of this phenomenon.
Telecommunication Company of Tehran is one of the powerful companies that serve communication services and infrastructures.TCT has taken great steps in the development of telecommunication networks and for this purpose, as the main responsible organization in Iran, it has utilized the most advanced equipments and services such as digital switching centers, mobile phones, data networks, satellite services, Internet and special telephone services during the recent years. TCT has a key role in economic growth of Iran. Acceptance of Iran in WTO provides superior opportunities to penetrate in the Middle East and member’s markets. In addition entrance the new competitors in communication market of Iran (Irancell and Taliya) causes TCT to increase its services quality, productivity and customer satisfaction.
The purpose of this research is to investigate the impact of IT investment on productivity at Telecommunication Company of Tehran. Besides, the status of BPR approach in TCT, as a complementary investment for improving the IT influences, will be evaluated.
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In this research the production function model is used to assess impact of IT capital and labor in a government company and evaluate the BPR factors such as team working, paperwork and etc in order to obtain clear view about future investments and organizational change.
1-3-1. Objective of the research
The main objectives of the research are introduced in below:
• Investigating the productivity measurement models.
• Calculating the productivity during the specific period of time at Telecommunication Company of Tehran.
• Calculating the variant subjects of Information Technology in Telecommunication Company of Tehran.
• Measuring and analyzing the impact of IT investment on productivity at TCT.
• Investigating BPR indicators at TCT to improve the productivity.
1-4. Importance of the research
Rapid process of information, producing low price IT equipments and employing automation systems through the organizational levels in recent years cause corporations to access to the update information and knowledge easily and quickly.
Information Technologies are driving national development efforts worldwide. And a number of countries in both developing and the developed world are exploring ways of facilitating their development process through deployment and the exploitation of IT within their economies (Pourmirza, 2006).
More than 80% of the national GDP of Iran is created by governmental sectors.
Although economic stagnation impact on all companies in 1990s, IT investments have been increased over the past years (Jahangard, 2004).Government companies, which have the positive financial levels, are pioneers in this area. Besides, the organizational levels of the most government companies in Iran are pyramidal. These kinds of levels make a lot of waiting and wasting times so, heavy IT investment in the current processes may fall down the positive IT influences.
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Therefore, bright view of IT capital makes companies to better manage their recourses and future investments.
Rational complementary investments increase the positive impact of IT implantation (Albadvi and Keramati, 2006). Companies have implemented BPR approach to shift their fundamental unit of analysis from the business function to the business process, achieve remarkable improvements in critical, contemporary measures of performance and employ the real potential of IT investment through their organizations. BTN, British company in telecommunication area, is pioneer in implementing BPR. Thus, BPR approach can be an essential way for Telecommunication Company of Tehran to streamline its business activities.
In order to prove the importance of BPR in Telecommunication Company of Tehran, evaluation of its indicators is the first step.
Evaluating the impact of IT on productivity causes at least the following results:
• Telecommunication Company of Tehran evaluates the factors that affect on value added.
• Future planning for the value level of Telecommunication Company of Tehran can be facilitated.
• The resources management of Telecommunication Company of Tehran will be facilitated.
• Telecommunication Company of Tehran finds clear view about its future investments and organizational change.
1-5. Research Questions
The critical questions within the scope of this research are:
RQ1: What is the relationship between IT investment and productivity at Telecommunication Company of Tehran?
RQ2: Is there a meaningful difference between the present situation and the desired situation of Telecommunication Company of Tehran, with regard to BPR approach?
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1-6. Our Contribution
The study makes contribution to both theory and practice. Also, it has been conducted in two phases. In the first phase, the research problem has been confined to explore and describe the impact of IT investment on productivity. Production function model has been used to assess the impact of IT capital and labor at Telecommunication Company of Tehran. Hence, related financial and economic data were collected from Management and planning Organization, Iran Telecommunication Research Center, Telecommunication Company of Tehran and Telecommunication Company of Iran.
BPR factors have been evaluated in the second phase of the research. Several meetings with experts of Iran Telecommunication Research Center assisted us to prepare and localize the questionnaire. So, the practical information has been extracted through questionnaire data collection from head offices of Telecommunication Company of Tehran. Briefly in this study, the following theory and practical steps have been from the beginning, in order to reach the final results:
• Review the literature, in order to understand the relationship between IT and productivity deeply and find out the BPR indicators.
• Study of different methods to find an appropriate model for the first phase analysis.
• Model selection and modification based on the context (governmental telecommunication sector) characteristics in the second phase of the research.
• Start field work with gathering financial and economic data for the first phase analysis and distributing the questionnaires through the head offices of Telecommunication Company of Tehran to evaluate BPR factors in the second one.
• Data entry, analysis and data presentation.
1-7. Disposition of the thesis
The entire thesis is divided into seven chapters, as presented in figure 1.1.
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Chapter 1: Introduction
Chapter 3: Literature Review
Chapter 4: Methodology
Chapter 5: Data analysis
Chapter 6: Conclusion Chapter 2: ICT in Iran
Figure 1.1: Thesis outline
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Chapter Two ICT in Iran
This chapter presents the situation of Communication and Information Technology in Iran. Also a brief introduction of Telecommunication Company of Tehran will be review at the rest of this chapter.
2-1. Introduction
Information and communication Technologies (ICTs) causes economic variables to improve. These influences are considerable in developing countries (Qabadi, 2006).
Developing digital networks, computers, Mobile communication, TV and etc have created unique capacity to enrich the knowledge in ICT area.
In millennium, 80% of ICTs’ market was covered by the top ten countries of the world.
And the bottom ten underdevelopment countries just employed 1% of the market.
Digital Divide is defined as the difference between developed and underdevelopment countries in using ICT to improve productivity and efficiency of processes and to make appropriate infrastructures for creating Knowledge of ICT and consuming the digital goods and services. China, Vietnam, Poland and some others are able to fill digital divide. China has tried hard to change traditional economy and improve its national 19
economy level by employing High – Technologies. So, these investments let china had 27% annual economic grow in 1992 and more than 220 Billion dollar ICTs’
expenditures in 2006 (Witsa, 2003).
Nations worldwide have recognized developmental opportunities and challenges of the emerging information age characterized by ICT. These technologies are driving national development efforts worldwide and a number of countries in both developing and developed world are exploring ways of facilitating their development process through development, deployment and the exploitation of ICT within their economies and societies.
2-2. ICT in Iran
In 1857, the first line of telegraph was started its activity between Tehran and Chaman Soltanieh (near Zanjan).Two years later, this line was stretched to Zanjan, Tabriz, Jolfa and connected to Russia’s Telegraph network. Iran was accepted as a member of International Union of Telegraph in 1869.
The first company, which has produced communicational equipments, was established in 1966. In recent years, government has invested in digital switches, Fiber cable, Mobile phone, Information Networks, Satellite, Internet and telephones services(Iran Telecommunication research center, 2003).
Government plays a key role to facilitate the use of ICT in Iran. All governmental institutions in Iran were pooled into the portal www.salamiran.org in 1998. Iran first time introduces the e-government system in 2005 while using Internet for internal public administration communication. Iran has been also a pioneer with discussions about e-banking but currently the implementation has been delayed due to some factors (Iran Daily 15th June 2006).
49% of current revenues from Iran’s small and medium sized ICT and telecommunications enterprises come from exports. Over the past five years, a key focus of foreign investment in Iran has been on ICT (telecom) infrastructure, accounting for about 20 percent of 130 major investments. In the last three years Iran has established a thriving mobile telecommunications sector, winning the GSMA global trade association's Government Leadership Award for 2006.
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The performance of Iranian ICT cluster is based largely on the developments of telecom, as it provides substantial input to computer services and equipment production (Iran Daily, December 2005). This has also been a prerequisite for Internet usage growth because providing good quality Internet connections is vital for attracting wider public to the Internet. Iran was one of the first countries in Asia to get private investments into the telecommunications industry when Pars Telephone Kar (PTK), Keresm Communications Research (KCR), and Hi Tel Kar (HTK) acquired a 57%
stake in Iran’s Telecommunication Industry (ITI) in 2002/2003. From 2005, ITI enjoys the exclusive rights for providing basic services granted by the Concession Agreement.
Since 2003 the number of telecommunications companies increased remarkably (ITI annual report 2005) which means higher competition, diversity of services and growth of quality (Pourmirza, 2006).
2-2-1. ICT indicators
In this section the ICT Developing indicators, which were introduced as the appropriate indicators to evaluate the situation of ICT by Consortium of national union, are presented.
• Number of telephones
Telephone is one of the important communication services, which is identified as the basic service in ICT area. Nowadays, this basic service develops by focusing on fiber cables. Table 2.1 demonstrates the status of Telephone indicators in Iran.
Source: www.tci.ir
Table 2.1: Status of Telephone in Iran
Content 2000 2001 2002 2003 2004 2005 2006 2007
unit Oct
Online
phone 9486260 10896572 129344167 15340805 17798809 20340060 22626944 23681454
Penetration
Coefficient 14.9 16.78 19.73 23.06 26.32 29.71 32.57 33.15
Public Telephone
86999 94311 100793 116776 128558 144145 168075 190017
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• Number of mobile phones
Development of mobile phone is introduced through the economic, Cultural and social plans.
First economic, cultural and social plan (1990-94): in this period of time, GSM technologies were introduced in Europe. Without any scientific marketing research, the small mobile network was established by government to Cover Tehran. Capacity of this network was about 10000 mobile lines.
Second economic, cultural and social plan (1995-99): Iranian customers welcome this new communication technology. Therefore, government presented mobile communication for 450000 customers in Tehran and 220000 customers in other cities.
Third economic, cultural and social plan (2000-04): In 2000, 900000 online mobile lines were established and about 337 cities were covered across Iran. Capacities of mobile networks were augmented and about 3.5 million customers and 937 cities were covered up to end of this period of time.
Fourth economic, cultural and social plan (2005-09): Capacity of mobile services have increased in this period however, the quality of mobile communication has felt down.
Government executes some projects to overcome the problem.
Irancell and Taliya are non government companies which have initiated mobile services in recent years.
Table 2.2 introduces the status of mobile phone indicators in Iran since 2000 up to 2007.
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Content 2000 2001 2002 2003 2004 2005 2006 2007
unit Oct
Online Mobile
phone 962595 2083353 2279143 3449876 5075678 8510513 15385289 21561954
Penetration Coefficient
1.51 1.72 3.48 5.19 7.49 12.43 22.20 31.15
Cities covered 337 493 594 708 851 999 1016 1016
covered roads
(KM) 800 8500 9000 10000 25000 26000 32000 -
Countries have international
rooming
- 3 5 7 30 58 80 80
*Coefficients were calculated as each 100 persons Source: TCI website
Table 2.2: Status of mobile phone in Iran
• Number of Computers
According to the last issued report, in 2001, about 4.5million computers were used by Iranian people. These computers were increased up to 7 million in 2004(penetration coefficient: 10.4%). Table 2.3 exhibits the situation of computers’ diffusion among various user groups
BUSINESS USERS GOVERNMENTAL USERS DOMESTIC USERS
19% 26% 55%
Table 2.3: Computers’ diffusion
Furthermore the annual computer sale is about 1.2 million in Iran (Tabesh, 2004).
• Number of Internet users
In recent years, Government attempts hard to enhance internet access for the public people. Cheap and easy access to the internet is the main goal of Iranian government.
Increasing the rate of internet from 9.74% to 30% indicates these kinds of endeavors.
Table 2.4 shows the number of internet users in Iran.
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Year Number of Internet users
2000 200,000
2001 1,700,000
2002 3,200,000
2003 5,500,000
2004 6,600,000
2005 6,750,000
2006 7,350,000
2007 11,260,000
Source: High Council of Informatics
Table 2.4: Number of Internet users
Furthermore, based on the Information Technology report of Europe and official website of Telecommunication company of Iran, table 2.5 demonstrates the situation of Internet penetration in different countries.
Countries Internet penetration coefficient(2005)
Growth (2000-05)
China 7.9% 357.8%
Denmark 69.9% 92.9%
Egypt 6% 833%
France 42.2% 201.4%
Hong Kong 70.7% 113.7%
India 3.6% 684%
Iran 10.8% 2900%
Iraq 0.1% 188%
Israel 45.8% 152%
Italy 49.3% 118.7%
Kuwait 23.7% 300%
Japan 60.9% 65.8%
Pakistan 5.7% 5522%
Saudi Arabia 11% 1170%
South Africa 9.9% 99.9%
South Korea 65.2% 71.1%
Spain 37.1% 199%
Sweden 75.2% 68%
Turkey 13.9% 411%
*Coefficients were calculated as each 100 persons
Table 2.5: Internet penetration in designated countries
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• Key indicators of ICT used at firm level
Based on WSIS report (2003), the e-commerce indicators have shown that ICT employment, at the firm level in Iran, is far from the desired situation. According to table 2.6, just 3 percent of Companies in Iran employed website through their business in 2005.
There is no accurate information about using internet in Iranian companies. However Iran small industries and Industrial parks organization issued that lack of Internet equipments is considerable in some industrial parks.
Indicators 2004
(base)
2005 2006 2007 2008 2009
Companies which employ website - 3% 9% 16% 23% 30%
Active companies in E-commerce - 1% 2% 3% 4% 5%
- 2% 4% 6% 8%
Rate of business through electronic networks to Total business(based on GDP)
10%
Source: Forth economic, cultural and social plan, 2004
Table 2.6: E-commerce indicators 2004-09
2-3. Information Technology sector in Iran
IT is a term that encompasses all forms of technology used to create, store, exchange, and use information in its various forms (business data, voice conversations, still images, motion pictures, multimedia presentations, and other forms; including those not yet conceived). It is a convenient term for including both telephony and computer technology in the same word. With most of the global IT company presence in Iran, and with revenues growth (35%) yearly, the IT industry is probably the most exciting and dynamic sector in the country today. The industry is characterized with about 100000 professionals, major ongoing IT projects within the government and the private sector to the tune of hundreds of millions of US dollars, and world-class software product and services companies bears testimony to the vibrancy of the IT and IT enabled services sector in Iran. The convergence of communications, computing, and entertainment has resulted in the blurring of boundaries between disciplines and IT companies now come in all shapes and sizes. IT has indeed been taken out of the closet and has been mainstreamed into every aspect of industrial and economic activity within the country (Pourmirza, 2006).
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2-4. Telecommunication Company of Tehran
Telecommunication Company of Tehran (TCT) has separated from Telecommunication Company of Iran since 1995.Installation, development and maintenance of the communication networks (Mobile and fixed) in different private and governmental area through Tehran province are undertaken by TCT. Furthermore, enhancing the quality level of communication networks, establishing and developing different internet services (ISDN, ADSL and etc…) and Intelligence system (VOT, UPT, NP and etc…) are pointed out as the other services.
80 communication centers, under control of 7 main communication zones, cover Tehran. Besides, more than 390 communication centers undertake communication activities of TCT in the other cities of Tehran province.
2-4-1. ICT indicators of Telecommunication Company of Tehran In this part, some of ICT indicators of Telecommunication Company of Tehran are presented. Telephone is the basic communication. According to table 2.7, TCT could not increase or just stabilize the increase rate of its penetration coefficient in recent years.
Operation coefficient Penetration coefficient
Year
20.9 85
1998
86
1999 22.24
2000 - 88
2001 22.24 89
2002 - 86
34.88 84
2003
86
2004 39.08
2005 44 83
84 46.03
2006
*Coefficients were calculated as each 100 persons
Table 2.7: Status of Telephone in Tehran province
Table 2.8 demonstrates the number of online mobile phones. According to the total mobile phones in Iran, about 50% of them are served in Tehran province.
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Number of online mobile phones Year
1996 49199
1997 150185
1998 217788
1999 261688
2000 503774
2001 1100321
2002 1186123
2003 1735298
2004 2539970
4173726 2005
7231085 2006
Source: www.TCT.ir
Table 2.8: Number of online mobile phones in Tehran province Table 2.9 is the last table which exhibits the main ICT indicators of TCT.
Indicators 2004 2005 2006
Number of Set up telephones 5496886 6400765 6796552 Number of online telephones 4742703 5331262 5704273
Number of public telephones 34783 36595 35715
Number of villages that have communication networks
1151 1181 1214
Number of special services’ clients 665704 733131 758081
Number of ADSL-clients - 6700 28691
Number of ISDN -Clients - 997 8283
Average of waiting time to engage telephone 6 (month)
4.5 0.47
Source: Telecommunication Company of Tehran
Table 2.9: ICT indicators in TCT
Telecommunication Company of Tehran is one of the government companies, which has favorable balance of finance. By considering the situation of above presented services, TCT plays a key role in the economic growth of Iran.
Table 2.10 shows the financial situation of TCT over the past 11years.
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Thousand IR Rials
Profits Total Costs
Revenues Year
3670501130 33407663
370397793 1997
44204705.4 406588691
450793397 1998
1999 509893000 459863000 50030000
2000 1702151382 635777035 1066374347
2001 1743790000 788531000 955259000
2002 2317712954 967960785 1349752169
2003 2849574938 1195415000 1654159938
2004 5002317852 3399824214 1602493638
2005 5083937593 3980463849 1103473744
2006 5641097557 3793610760 1847486797
962 654 051
7 5191303099 1860351863
2007
Table 2.10: Financial indicators of TCT
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Chapter Three Literature Review
During the last few decades, organizations have made immense investments in IT. The implications of these investments for productivity have been widely discussed in business and academic communities. Besides, according to the role of IT in Business process reengineering, BPR is essential for companies to increase potential impact of IT to overall performance of a company. This chapter will frame the study in the theoretical context and provides an overview of relevant literature, relating to productivity, to direct theoretical contexts toward research questions.
3-1. Productivity
Productivity growth is identified as the foundation for economic prosperity, a prerequisite for national development and also an important indicator of organizational competitiveness (Dedrick et al., 2003). Measured productivity therefore shapes the political decisions of national governments and management decisions within organizations.
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The word “productivity “has become such a buzz word these days. It is almost mentioned in different fields such as commercial magazine, newspapers, political speeches, TV news, business news, social magazine and etc…
In a formal sense, probably, the first time the word “productivity “was mentioned in an article by Quensay in the year 1766. In 1833 Littre defined productivity as the “faculty to produce “, that is, the desire to produce. In 1950, the Organizational European Economic cooperation (OEEC, 1950) offered the more precise definition of productivity: “Productivity is the quotient obtained by dividing output by one of the factors of production. In this way it is possible to speak of the productivity of capital, investment, or raw materials according to whether output is being considered in relation to capital, investment or raw materials “After this time many economic specialists offered other definition from productivity. Sumanth offered that total productivity is the ratio of tangible output to tangible input (Sumanth, 1984) and Siegel said productivity is a family of ratios of output to input(Tabatabae, 2000).
Finally, productivity can be defined as the below formula:
(Output obtained) (Input expended) Or
(Performance achieved) / (Resources consumed)
Traditional economic studies of productivity focused on labor and capital such as plants and equipments. In order to measure capital, all component categories are considered. This issue is also considering about measuring labor. In some cases the number of the labors is used and in some other cases the person- hour for special period of time is regarded.
Increasing the productivity growth causes that:
• The life level in the investigated countries goes up.
• Inflation is decreased.
• The buying power of the people is increased.
• The life quality is improved and etc…
Some authors distinguish between productivity and efficiency. While productivity applies to the transformation of input to output in a process, efficiency expresses the relation between input and output in monetary terms. Thus measured, the results not only indicate the improvement in output per man-hour or the change in the quantity of 30
inputs, but also the importance of changes in costs of inputs such as human resources(Rapp, 1999) .In this study, however, no difference is made between productivity and efficiency and the term productivity will primarily be used.
3-2. Common misuse of the term
The term “productivity “is often confused with the term “production “. Many people think that the grater the production, the greater the productivity. This is not always true, the meaning of productivity and production are different. Production is concerned with the activity of producing goods and / or services. But productivity is defined with the efficient application of resources in producing goods and / or services.
3-3. Basic types of productivity
At this part two basic types of productivity will be introduced.
3-3-1. Partial productivity
Partial productivity is the ratio of output to one of the consumed resources. For example capital productivity is the ratio of output to capital input or Materials productivity is the ratio of output to materials input and labor productivity is the ratio of obtained output to labor input. Also Labor productivity can be defined as the traditional, generally used indicator – measuring output produced per a certain unit of labor time, usually per man-hour (Janáček and Zamrazilová, 2001).
Advantages:
1. Easy to attain the data
2. Easy to compute the productivity indices 3. Easy to understand
4. Good diagnostic tools for productivity improvement. if used along with total productivity indicators.
5. Easy to sale management because of the above first third advantages.
Limitations:
1. If used alone, can be very misleading and may lead to costly mistakes.
2. Tend to shift blame to the wrong areas of management control.
3. Profit control through partial productivity measures can be a hit and miss approach.
4. Do not have the ability to explain overall cost increases.
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3-3-2. Total Factor Productivity (TFP)
Total – factor productivity is the ratio of the net output (pure output) to the sum of associated labor and capital input. “Net output “means total output minus intermediate goods and services purchased. Theoretically, TFP is a relevant measure for technological change by measuring the real growth in production value, which cannot be explained by changes in the input of labor, capital and intermediate input (Zhi et al., 2001).
A series of articles that appeared in the recent World Bank Economic Review highlights the important role of total factor productivity (TFP) in the process of economic growth of countries (Cororaton, 2002).Total Factor Productivity measures the synergy and efficiency of the utilization of both capital and human resources. It is also regarded as a measure of the degree of technological advancement associated with economic growth. Higher TFP growth indicates efficient utilization and management of resources, materials and inputs necessary for the production of goods and services (NPC report, 2003). TFP also refers to the additional output generated through enhancements in efficiency arising from advancements in worker education, skills and expertise, acquisition of efficient management techniques and know-how, improvements in an organization, gains from specialization, introduction of new technology and innovation or upgrading of existing technology and enhancement in Information Technology (IT) as well as the shift towards higher added value processes and industries (Cororaton, 2002).
Generally, higher productivity growth is associated with growth in Capital Intensity (CI) and the growth in TFP. Capital Intensity measures the physical capital expansion (Fixed Assets) allocated to each employee. This measure indicates whether an enterprise adopts a capital-intensive or labor intensive policy. Higher CI provides the advantage of technology, quality, volumes and speed to increase productivity and hence generate greater output.
3-3-2-1. Sources of Total Factor Productivity Growth
There are five major determinants of TFP growth. (a) Demand Intensity which indicates the extent of productive capacity of the economy. A slow-down in demand intensity would result in unused capacity, lowering the utilization of existing
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machinery and equipment. Demand intensity is reflected in sales performance. (b) Education and training of the worker which aims to upgrade skills, and knowledge.
With higher level of skills, workers will be more efficient and produce better quality products and services. (c) Economic restructuring which refers to the movement of resources from less productive to the more productive sectors of the economy.
Experience of the developed countries indicates that resources in the more Productive sectors of the economy were utilized at the more efficient level than resources in the less productive sectors. (d) Capital structure which relates to the proportion of investments in productive capital inputs. Investment in machinery and equipment which are productive capital inputs yields immediate output as compared to infrastructure, plant and buildings which have longer lag time. (e) Technical progress which relates to the effective and efficient utilization of technology, innovation, work attitudes and management and organizational effectiveness. With high technological capabilities, a motivated workforce and as effective management, higher value-added products and services will be produced at competitive costs (NPC report, 2003).
Advantages:
1. The data from company records are relatively easy to obtain.
2. This factor investigates the efficiency of resources convert and studying the value added that made in the companies.
3. Planning and managing the resources will be facilitated by measuring TFP.
4. Measuring TFP causes that the company knows how to compete and recognize and increase its ability for competing in target market.
Limitations:
1. The value added approach is not very appropriate in a company setting because it is difficult for middle managers to relate the value added output to production efficiency.
3-4. Benefits of productivity measurement in the organizations Productivity measurement should be considered in order to organizations know in which productivity level they are working now and in which corresponding level should be operating productivity measurement also shows the direction for companies within their industries. Productivity measurements in the organizations have the following benefits:
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The organizations access to the conversion efficiency of their resources. Hence, more goods and services are produced for a given amount of expended resources. Also resource planning can be facilitated. The economic and none economic objectives of the companies can be re organized by the priority in the light of the productivity measurement efforts.
Measuring and investigating the productivity create the competition action among companies. Strategies to improve productivity would be determined based on the extended distance (gap) between the planned level and measured level of productivity (Sumanth, 1981).
3-5. Benefits of the higher productivity in the organizations Higher productivity in a company with the respect to physical and human resources will mean higher profit because, Profit = revenue – cost of goods and services produced by the utilization of the material and labor resources( Bernolak, 1976 ).Also higher productivity can be translated in to higher real earning for its employees.
Moreover, it causes the cost of manufacturing to be reduced and the customers to pay relatively low price. This role increases the market share (Tabatabae, 2000).
3-6. Economic performance
Economic performance can be interpreted in a variety of ways at each level of analysis.
At the country level it usually refers to economic growth, labor productivity growth, and consumer welfare .Economic growth is the rate of change in real output, or GDP, and is measured at the country level. Labor productivity growth, is a measure of the efficient use of (human) resources to create value. It “allows the economy to provide lower-cost goods and services relative to the income of domestic consumers and to compete for customers in international markets” (McKinsey Global Institute 2001, cited by Dedrick .2003). Corresponding measures focusing on the output of an industry sector and companies are utilized at the industry level and company level (kraemer et al., 2003).
Clearly, labor productivity growth is also an indicator of the economic performance of firms. A firm that is more productive than its competitors will generally enjoy higher profitability, which is of course, also an important measure of economic performance 34
for firms. A more productive firm will either produce the same output with fewer inputs and thus experience a cost advantage, or produce higher quality output with the same inputs, enabling a price premium. Sustaining higher profits through productivity gains requires a firm to maintain productivity levels higher than its competitors.
Therefore, over time, profits might be competed away with result that consumers benefit (Gurbaxani et al., 2003).
3-7. Information Technology and Productivity
Some recent studies have highlighted both the opportunities and the challenges that IT has imposed on the world economy. For instance, Hitt and Brynjolfsson (1996) have analyzed the implications of IT on productivity while studies by Stiroh (2001), Pohjola (2001) have looked at growth and development (Satti and Nour, 2002).
Proving the business value of IT on organizational productivity has been a major concern of information system (IS) research. It has been a matter of much debate whether or not investment in IT provides improvements in productivity and business efficiency. In 2002, Morgan Stanley reported that US companies wasted $130 billion in the previous 2 years on technology. While organizations have increased investments in IT in order to improve organizational performance, findings from earlier IT productivity studies have been inconclusive despite the fact that several recent firm- level empirical studies have found a positive relationship between IT investments and organizational performance. For several years, scholars and policy makers lacked conclusive evidence that the high levels of spending on IT by businesses improved their productivity, leading to the coining of the term “IT Productivity Paradox”.
Morrison and Berndt (1990) concluded that additional IT investments contributed negatively to productivity, arguing that “estimated marginal benefits of investment in IT are less than the estimated marginal costs”. Others, such as Loveman (1994) and Barua et al. (1991), said that there is no conclusive evidence to refute the hypothesis that IT investment in inconsequential to productivity. Of late, researchers working with firm-level data have found significant contributions from IT toward productivity (Brynjolfsson and Hitt 1996). Most of these firm-level studies have been restricted to the manufacturing sector, in large part owing to lack of firm-level data from the service sector.
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