IT Assets, Organizational Capabilities, and Firm Performance: How Resource Allocations and Organizational Differences Explain Performance Variation

Sinan Aral () and Peter Weill ()
Additional contact information
Sinan Aral: Massachusetts Institute of Technology Sloan School of Management, and New York University Stern School of Business, 44 West 4th Street, Room 8-81, New York, New York 10012
Peter Weill: Center for Information Systems Research, MIT Sloan School of Management, 3 Cambridge Center, NE20-332, Cambridge, Massachusetts 02142

Organization Science, 2007, vol. 18, issue 5, 763-780

Abstract: Despite evidence of a positive relationship between information technology (IT) investments and firm performance, results still vary across firms and performance measures. We explore two organizational explanations for this variation: differences in firms' IT investment allocations and their IT capabilities. We develop a theoretical model of IT resources, defined as the combination of specific IT assets and organizational IT capabilities. We argue that investments into different IT assets are guided by firms' strategies (e.g., cost leadership or innovation) and deliver value along performance dimensions consistent with their strategic purpose. We hypothesize that firms derive additional value per IT dollar through a mutually reinforcing system of organizational IT capabilities built on complementary practices and competencies. Empirically, we test the impact of IT assets, IT capabilities, and their combination on four dimensions of firm performance: market valuation, profitability, cost, and innovation. Our results---based on data on IT investment allocations and IT capabilities in 147 U.S. firms from 1999 to 2002---demonstrate that IT investment allocations and organizational IT capabilities drive differences in firm performance. Firms' total IT investment is not associated with performance, but investments in specific IT assets explain performance differences along dimensions consistent with their strategic purpose. In addition, a system of organizational IT capabilities strengthens the performance effects of IT assets and broadens their impact beyond their intended purpose. The results help explain variance in returns to IT capital across firms and expand our understanding of alignment between IT and organizations. We illustrate our findings with examples from a case study of 7-Eleven Japan.

Keywords: business value of information technology; information technology assets; resource-based theory; complementarities; IT infrastructure; IT capabilities; IT practices; firm performance (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (151)

Downloads: (external link)
http://dx.doi.org/10.1287/orsc.1070.0306 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ororsc:v:18:y:2007:i:5:p:763-780

Access Statistics for this article

More articles in Organization Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().