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How the Information Technology Firms Can Grow and Perform Through Capital Allocation

Taking revenue growth in four SIC 737 information technology (IT) industries as an outcome of their capital allocations, we study how firms can achieve optimal revenue growth, while simultaneously assessing its effect on certain targeted performance measures that include the cost of revenue, earnings before interest and taxes, profit, gross profit margin, cash flow, and the times interest earned. We employ multivariate data analysis techniques to identify and confirm the management decisions that could become the growth drivers, such as the allocations for research & development, capital expenditure, selling, general and administrative expenses, and property, plant and equipment. With these as the capital allocation strategies, we arrive at the industry by industry processes for selecting a strategy. We find that R&D is not the most efficient way to grow and perform for all the industries. We give guidelines for achieving revenue growth and selected performance for the IT firms by their industry. Some directions for further research are provided.